We've been content to sit on our hands once the rally started, as it only seems to be a slight unwind of some of the frothiness that macro markets have priced in for the Donald Trump rally. Our first real tests are approaching quickly with gold's 50 DMA at $1,192 and a slew of support for the USD about $.50 below here.

By our count, gold has actually outperformed what you would expect if given just the other inputs of USD, rates and equities. So while it may run out of momentum in the short term, there is plenty of room for encouragement in the months ahead.

As we had noted previously, the macro world had priced in perfection of execution on a Trump policy that a.) seems a bit ill-defined and b.) historically affects the global economy less than newspapers and pundits might otherwise lead you to believe ("but it's different this time!").

While markets had lagged under the underlying strength of the U.S. labor market, the reversion seems a bit overcooked. We are hopeful for further upside, but eager to see if we can break the near downslope of the 50 DMA.

Bull Case

  • GC EFP getting going to flat has some good coincidental history with short-term lows.
  • CFTC positioning for specs down for eighth straight week. Net positioning at levels not seen since February of last year. Plenty of longs, but shorts have risen to January '16 levels.
  • Upward sloping channel has been solid since Dec 15.
  • DXY is well off its 104 peak, currently at 101.90. Gives some breathing room for the gold strength.
  • Index rebalance this week means we will get a slight bid each day on the close from the broad commodity indices.
  • Vols are at depressed/ing levels and are a stone's throw from being good value for at the money's.

Bear Case

  • The rate may have slowed, but the momentum in the ETF holdings is still negative. Most longs are still underwater and a turn down could hasten liquidations further. Positive feedback loop.
  • The slightest kick higher in rates probably restarts the bond selling machine, strengthens the dollar and puts gold on the back foot.
  • The econ data is good and continues to surprise to the upside — in the U.S. at least; EU and Japan, less so.
  • Call skew is creeping back into the options market and across most tenors. Dare I say there is actually some positive feelings that we put in a bottom at the $1,146 retrace level?
  • Fed expectations are for continued dovishness, but the seat rotation will be slightly more neutral to hawkish in voting members this year.
  • Downsloping 50 DMA at $1,192 will likely be resistance.
  • Support from crude oil may be dampening as $55 seems to be stout resistance even with OPEC "cuts" as U.S. producers are bringing rigs back online, albeit nowhere near 2009-2011 pace. Once bitten, something something.
  • I've been fantastically wrong the last couple of years, but I think we may actually be underpricing the number of FOMC hikes this year.
  • Related: Average hourly earnings continue to grind higher, and all market labor indicators are sliding from neutral to perhaps overheating.

Chart 1

Gold, rates and DXY — What else is new? It's what seems to drive our machine in the absence of headlines.

USDJPY has been the best standalone indicator for magnitude, while we have noticed that 10-year and two-year rates have been best for direction lately, or at least calling the move earlier.

You can also see gold's recent nemesis in the form of its own 50 DMA shadow drawing nearer (smooth green line).

Chart 2

Net positioning (yellow) down 85 percent from peak. This had been the primary indicator through the fall that the levels were unsustainable, and now we have completely reset the table — though it's interesting to note the rise in open interest (orange) on account of new shorts in the market.

It would seem we are no longer a one-way trade for the time being, even though we have only traded in two narrowly defined channels (down, then up) since basically the election.

Coin Toss

Without a change in paradigm, I think we get some trend reversion here and run out of steam at the 50 DMA, with rates and DXY ticking higher as headwinds. Might even test the lows again before any real breakout momentum develops, but that's a long ways off, and we are a weekly series. Lower.