By Barani Krishnan
Investing.com - “What goes up, must come down”, Newton famously said. I can hear gold bulls adding: “What came down will also go back up.”
In one of the most jaw-dropping swings in gold, prices of the yellow metal gyrated $107 an ounce between the high of Tuesday and low of Friday, before ending the week up 50 cents. For a second week in a row, gold was behaving more like natural gas, the bucking bronco of commodities, after swinging almost $129 the previous week.
Science historian Darian Hayton has reminded traders to stop abusing Isaac Newton’s third law of motion. He said the father of physics had explicitly referred to the movement of macroscopic objects travelling at relatively slow speeds — not the behavior of humans, stock markets, currency exchanges, Bitcoin, gold or, for that matter, “the price of kale at your local organic grocery store”.
While I may appear guilty of having done the same, my point of citing Newton is to show there’s nothing scientific — even logical — to explain this week’s volatility in gold predicated on the “strength” of the dollar.
To be sure, fundamentally, there’s nothing even remotely strong about the dollar.
For the first three days of the just-ended week, the greenback was on a logic-suspending rally — just like the previous week — while gold has suffered, at its expense.
The driver was apparently the Federal Reserve’s meeting minutes for July released on Wednesday. The Fed, at its July 28-29 meeting, dismissed the notion that it should exert controls over the yield curve, the minutes showed.
Benchmark yield from the U.S. Treasury’s 10-year note had been negative for most of the past two months and forex traders had been hoping the Fed would keep it that way by subjecting controls on the instrument.
When the minutes released Wednesday showed the central bank had balked at the idea, it gave forex traders an excuse to drive the Dollar Index higher. This is in spite of the trillions of dollars of stimulus issued by the U.S. Congress, and the central bank’s vow to keep ballooning its balance-sheet to support a pandemic-struck economy.
While U.S. new home sales and PMI data were supportive of the greenback on Friday, the Dollar Index’s continued stay at the 93 handle baffles many analysts who expected a range of below 92.5 as fair value.
Some traders believe nefarious activity was behind the boost in bond yields and the dollar over the past two weeks — to create a pump-dump-pump action that would first move the greenback up and gold down, before reversing them to enable those positioned correctly to profit both ways.
By happenstance, this week’s outsized moves in gold and the dollar began on Wednesday — the same day the Commodity Futures Trading Commission ordered the Bank of Nova Scotia to pay a record $77.4 Million for so-called spoofing of gold trades from eight years ago. While nefarious activity like this can be conducted both ways — even in a rising gold market — and it would take years for investigations to be done and proven, they cannot be ruled out, particularly with the dollar’s unwarranted rise in the just-ended week.
Back to gold, the door isn’t closed for a return to $2,000 pricing in the week beginning Aug 24, analysts say.
One reason for this, they say, is the Fed’s annual Jackson Hole symposium in Wyoming that could energize gold bulls and dollar bears back into action. The central bank’s chair Jay Powell will deliver at the Aug 28-29 retreat the Fed’s Monetary Policy Framework Review, which should double-down on the pledge for ultra-low rates and more currency debasement. Perhaps that’s that’s what’s required to bring dollar bulls back to their senses.
“Gold will likely resume the uptrend and revisit the record high of $2,075 if Powell signals greater tolerance for above-target inflation, fueling a deeper drop in real or inflation-adjusted bond yields and fresh sell-off in the greenback,” said Omkar Godbole on FX Street.
Underscoring Godbole’s call, December gold futures finished on Friday their first post-settlement session in the green since last Tuesday, concluding a final trade of $1,947.60, that came in a modest 80 cents above the week’s official close.
“The best thing for gold right now will be if the economic recovery continues but is not too robust, thus cementing the need for more fiscal and monetary stimulus,” said Ed Moya, analyst at OANDA in New York. “Too many risks to the outlook remain for anyone to abandon the gold trade.”
On the oil front, crude prices settled lower on Friday after data showed the U.S. rig count jumped double digits for the week. That suggested crude drillers in the world’s largest producing country were adding to output despite a questionable demand outlook amid the coronavirus pandemic.
Rigs actively drilling for oil in the United States stood at 183 this week, versus last week’s all-time low of 172, oil services firm Baker Hughes said in its routine survey.
Baker Hughes had not reported a single oil rig addition since February, even before the coronavirus outbreak in the United States which decimated demand for energy. It has been more than a year since there was a double-digit rise in rigs.
The surge in rigs suggest that U.S. oil drillers were getting comfortable with crude prices at around $40 per barrel.
History has shown that rig additions, once they begin, can quickly rise in shale oil patches. The result typically is higher production than the market can bear, a phenomenon that ultimately weighs on crude prices. The U.S. oil rig count stood as high as 1,606 in 2014, triggering a price crash that took crude to around $25 per barrel two years later from previous highs above $100.
Precious Metals Weekly Review
Benchmark December gold futures on Comex settled at $1,946.80 versus the previous session’s close of $1,946.30. The high for the session was a relatively nearby $1,962.95, while the low was a heart-stopping 1,916.90. While December gold moved up 50 cents, or 0.03% on the day, for the week, it fell 0.16% on the week.
The spot price of gold, which reflects trades in bullion, was last down $6.39, or 0.33% on the day, at $1,940.71. Spot gold, which typically trades at a discount to Comex, traded between $2,015.45 and $1,911.65 for the week, sliding 0.22%.
Energy Weekly Review
In Friday’s trade, New York-traded West Texas Intermediate, the benchmark for U.S. crude futures, settled down 48 cents, or 1.1%, at 42.34 per barrel.
London-traded Brent, the bellwether for global crude prices, fell 55 cents, or 1.2%, to close the New York session at $44.35.
For the week, WTI rose 0.8% while Brent fell 1%.
Even before the Baker Hughes data release, crude prices were trading down on the day on reports of a ceasefire in oil-rich Libya — a development that looked set to increase global production and ruin OPEC’s 97% compliance rate on an oil production cut agreement.
OPEC, or the Organization of the Petroleum Exporting Countries, has 13 members led by Saudi Arabia. It also has 10 non-members allies that include Russia. It announced this week that demand for oil could be slower than expected, despite production cuts by its enlarged OPEC+ group.
Energy Calendar Ahead
Monday, Aug 24
Private estimates on Cushing oil inventories from Genscape.
Tuesday, Aug 25
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, Aug 26
EIA weekly report on crude stockpiles
EIA weekly report on gasoline stockpiles
EIA weekly report on distillates inventories
Thursday, Aug 27
EIA weekly report on natural gas storage
Friday, Aug 28
Baker Hughes weekly survey on U.S. oil rigs
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