(Stephen Innes – SPI Asset Management)
Gold is trading lower today after Friday’s NFP pushed back against recession imminent calls, US yields rose, and the dollar firmed slightly.
From here on out, for Gold to disconnect from the dollar and real rates again and move sustainably higher, the market has to start questioning the Fed’s commitment to meeting its inflation target, as it did early this year. If the US economy continues to be hit by stagflation shocks, the cost of bringing inflation back to 2% may prove too high. But this is, however, not the base case currently.
In a high-inflation environment, Gold tends to increase if the central bank is more focused on growth and falls if the central bank is focused primarily on the inflation fight. So with CPI week’s inflation data being paramount for determining the Fed’s actions at the May 3 FOMC, and given how sticky inflation still is, Gold speculators are cutting longs with US yields moving higher post-NFP.
Despite reports of the PBoC backing the truck up to the gold vaults last month, Shanghai premium offered the weakest incentive to new bullion imports into China since last July at less than half the historical average, reflecting weak domestic demand at Gold’s new record highs; hence physical could be moving East to West.
Our base case is Gold’s downside in the case of a ‘soft landing,’ or further Fed hawkishness is significantly less than Gold’s upside in the case of a growth shock that pushes the US economy into a recession. (10% down vs 30% up)
Since we are entering the peak uncertainty phase around the Fed’s next move, with investors debating if credit tightening from financial stress will be enough to warrant cuts or if we are heading for more hikes, so Fed uncertainty could be taking some steam out of very lethargic oil markets today, OPEC’s heavy hand has really tamped down volatility as bulls sit waiting for season demand to pick up and flip the market into a deficit.
But the oil market is certainly not getting much help from China’s recovery, which is taking longer than expected. In addition, China has ample oil inventories at the moment, while Asian imports have been flat in Q1.