11th August - Have Gold's Market Drivers Changed?
There were developments in the Middle East yesterday. Whilst the Iran-Oman deal is reportedly in its final stages, Iran has said it will not fully reopen the strait until they receive compensation from the US for the damage caused during the war. This prompted, unsurprisingly, a strong reaction from Trump, who asked for compensation from Iran for their actions over the last 50 years. The market has seen this as a sign that the deal with Oman will not be enough to fully open the strait and that there seems to be little chance in the short term of the US and Iran coming together for a deal.
Oil reacted to the news yesterday, with Brent rising 3.9% on the day and another 1.1% so far this morning. US Oil rose 4.8% and is also up another 1.3% this morning, with Brent now back above $90 and US Oil back above $80. Whether this rise is a temporary retracement is anyone's guess. We have seen over and over again since the start of the war how difficult it is to predict geopolitics and, as a result, the moves in oil.
Forex
The USD recovered slightly on the news from the Middle East, as some safe haven demand was attracted back to the dollar after moving away over the past week or two. How long this lasts, however, will depend on both the Middle East and, just as importantly, tomorrow's CPI print. The moves in oil prices yesterday mean that oil is now closer to the average it has been for the past month, meaning the hesitation I had yesterday about the CPI print being a reflection of a market that no longer exists is now less of a factor. This just means, however, that the CPI print will take on even more importance now. The markets are already concerned about the health of the US economy, meaning there is a chance that tomorrow's print will still have an asymmetric risk profile, just for a different reason than I had originally thought.
If we see a soft print, that will be further encouragement for the Fed to look at last rate hikes and consider rate cuts, which will be negative for the USD. A hot number would give the Fed more incentive and would normally mean the USD receives a bid. However, there have been the beginnings of concerns about stagflation in the US, where an economy struggles with inflation but also is in recession. If we see a hot print and this means confidence in the US economy is sufficiently damaged, it could cause capital to be withdrawn from the US market and, counterintuitively, a hot inflation print could cause the USD to fall.
I do feel the most likely scenario is just a slightly hot or cold number tomorrow, but it is worth mentioning that the risk of capital withdrawing from the USD is a real and present one, and one that should not be ignored.
Outside of the USD, it was a very quiet day for forex, with the majority of the market preparing for tomorrow's blockbuster CPI print. This morning, the RBA held rates in Australia at 4.35%, which was expected. The guidance surrounding the decision was mixed, meaning there has not really been a significant reaction in the AUD this morning to the news event.
Indices
As with forex outside of the USD, indices had a very quiet day. None of the major US indices moved more than 0.35%, with the Nasdaq falling by that amount on the day. All three moved higher on the open, before falling back to even or close to it by the close of the day. The market seems to be waiting for tomorrow's CPI print to decide on a direction for the near term, so we may see the same thing again today if there is no market catalyst to affect it.
Precious Metals
For me, this was the real story yesterday. Both Gold and Silver continued their rise, with Gold closing 1.15% up at $4,390 and Silver closing 3.3% up at $65.74. These are unremarkable numbers on their own, but the key factor was that this was on a day with oil prices rising amid uncertainty in the Middle East. For the past 6 months or so, metals have always struggled when oil prices have risen, as they have been almost exclusively a rate instrument. As rate hike fears grew, metals suffered, with relief for metals only coming when oil prices fell and rate hike fears eased.
Yesterday should have been a day when metals suffered, but they did not. This could be the first sign of a fundamental shift in the market's expectations for both metals and the larger US economy as a whole. With the US jobs market struggling and GDP coming in below expectations, there are now real fears of a period of potential stagflation, a worst-case scenario for an economy. The combination of rising prices and a weakening economy is historically one of the best scenarios for gold, as capital will flow away from the weakening US dollar and US stocks into the safe haven of gold and silver. To back this up, UBS now predicts gold will reach $5,000 by the first half of 2027, though it did caveat this by stating firming US data and rising oil prices could delay this.
All of this leads up to tomorrow's CPI print, which, as with Forex and indices, will be fundamental, and once again could have an asymmetric risk in favour of metals. A soft print will reduce the need for rate hikes and will be unequivocally good for metals. A hot print may increase the likelihood of rate hikes, but it will also erode confidence in the US economy and may lead to more safe haven demand for metals. Tomorrow will be absolutely fascinating to watch.
Todays Key Market Drivers
Iran - Nothing has changed in terms of the market impact the situation in Iran and the Middle East will have; news from here will move markets no matter the direction.
US CPI preparation - Without any news releases today, the markets will all be preparing themselves for tomorrow's blockbuster news release.
Comments