It seems we have gotten a small dose of the "Bad Trump" effect we spoke of last week.

Sure enough, DXY and yields are slightly lower, all while the Chinese New Year has many out of office. We still face some technical resistance through the recent $1,220 highs and will likely need help from the FOMC to talk down the dollar a bit further with some dovishness, but at least the rollover from a week ago has been stemmed for now.

Another good barometer will be if the Dow can regain the 20K level, though a dovish Fed creates a different mix of outcomes among assets than a volatile president, but either way could be good for metals. While not expected to hike rates outright (about 15 percent chance), any strong indications for when the three expected rate hikes may occur could throw cold water on our nascent rally.

Bull Case

  • Bad Trump! If anyone has insight as to when POTUS is about to tweet or sign trade-related executive orders, I'd appreciate a heads-up. Supposedly, much of his staff didn't even know about the travel ban signing until it was happening live on TV.
  • Open Interest at levels where we typically see a floor put in for metals. $1,200 would serve as a nice launching point.
  • Support from the 50 DMA at $1,175, though downward sloping.
  • Vols up half a point from the lows in 3m atm, as suppressed as they have been, we could see a short gamma squeeze if rally gains strength.
  • Dow off 20K level that everyone is watching.
  • Benchmark 2y and 10y yields are slightly off their December and early January highs, and I have even seen some articles advocating for buying duration here, so perhaps it's not all one-way.

Bear Case

  • Three rate hikes are still probable this year, according to the Fed, whereas the market isn't buying it.
  • Fed Funds Future is only pricing in 30 percent of three hikes by year's end, likely emboldened by recent history, only a 60 percent chance of two hikes. It could be easy to get caught offsides there.
  • $1,228 resistance from the 100 DMA likely stout. Break that, and we may have a race yet.
  • Contango staying fairly steep in the market, with futures pricing in 120 bps or so for gold longs for the year. That gets harder to justify paying if momentum stalls and UST's look attractive.
  • Econ data is still generally good, but earnings growth seems to be suffering at the hands of higher labor and commodity input costs (oil and gas much higher now y/y).

Chart 1

Open Interest in gold is plumbing the depths from the December lows and February 2016 before that. Both set the table for nice sustained rallies, but the difference this time appears to be short liquidation as much as anything else.

This chart shows the aggregate open interest for the four precious metals on the lower portion (prices, upper). The bold red line is the drop in aggregate OI for gold, and especially compared with its precious brethren, has seen a tough last couple of weeks.

As supported further by the SPDR GLD etf liquidations, institutional investors in futures, ETFs and even vols have had enough of trying to pick directions in this generally range-bound market, so we may need a new shift to reinvigorate things. I know just the orange man for the job ...

Chart 2

The disinflationary tailwinds of cheaper retail gasoline and crude oil are gone. In Q4 of last year, we turned a corner on higher y/y pricing for both WTI and retail gasoline prices. While many inflation indicators strip out the effects of these or at least dilute, it's still significant in the mind of the consumer and their wallets.

A small, steady increase is likely to create some small hawkishness. But a shock to the system, especially if driven by supply side, would paradoxically have the Fed sit on their hands, I think. We are at least 20 percent below anything considered shock levels, but it's interesting to watch.

Coin Toss

I can't decide which headline-following dynamic I enjoy less: the Greek crisis or POTUS. If you get the Good Trump/Bad Trump (as market interprets) and its effect on the dollar, you'll have 90 percent of the gold move figured out. Silver seems less straight forward these days, and it's low tick of $15.63 seems to be far in the rearview as we look to make new three-month highs today.

With Trump likely refocusing on domestic/econ issues, a primetime announcement of Supreme Court Justice and a Fed likely to remind everyone that they are in a hiking cycle, the balance of risk is to the downside, but I hope I'm wrong. Lower.