With French elections out of the way (for now) and basically all economic data continuing its trend of low growth, strong labor and retail demise, there isn't a lot on the calendar to cause a paradigm shift. At the end of the day, our view is that time and politics mostly don't change markets — rates do.

With that in mind, we are keen to watch anything leading up to the very much alive June FOMC meeting, currently at 90 percent odds for hike. With that mostly priced in, we are waiting for the back-end to move as well on September or December odds to finally hit the three-hike target for 2017.

If we combine that with the Fed announcement of "normalizing" the balance sheet, it's possible that financial conditions tighten enough to get asset managers to reprice forward assumptions.

Bull Case

  • Geopolitical tensions seem to be on the low simmer.
  • Though off the lows, Gold's 14-day RSI remains near oversold levels.
  • Silver still in oversold territory and has gotten good support in the low $16s. CFTC positioning almost 40 percent off the highs.
  • Short rates (and real rates in particular) have eased some over the last week, but are still at levels that make it difficult for gold to rally.
  • Upsloping 50 DMA lending nice support here at $1,227.

Bear Case

  • Physical demand is anecdotally as bad as most anyone can recall, though mint sales are showing some improvement through May buoyed by a couple large deals.
  • The downtrend channel from the July peak a year ago is still firmly intact, with midpoint showing about $1,245, so even a mild bounce likely has confident sellers waiting.
  • The DXY seems stuck below 100, especially with Europe looking to potentially outperform U.S. with much of the election fuss behind it. Now Brexit ...

Chart 1

Vols can stay low for a while. BBG data on implieds only goes back about 13 years, so we have to look at historical vols. 1991-1997 was an incredibly slow period for gold in particular as producers collared their output aggressively and central banks got in on the fun as well.

We don't seem to have those same two players affecting the market today as then, but given the size of the global equity and bond markets and relative sanguinity, it is possible for things to have a similar period. In good news, if that is the case, we are already about six months into the low-volatility regime. So maybe only six years to go! (Please no, please no, please no ...)

Chart 2

Current state of affairs. This is one-month historical (blue), one-month implied (orange) and one-year implied (white, shaded). While we have clearly seen short bouts of 1m vols get in the 10 percent range before, it's odd to stay there for this long, and so we see the long end of the curve (white) coming down precipitously.


MS metals desk had a great note yesterday about VIX selling being driven by the drop in dividend yield on the SPX as the larger denominator, so long-equity folks have to sell upsides to juice the yield on their book. With VIX and gold vols having pretty good long run correlations, it has some bleed-over effect beyond just the obvious macro assumptions we discussed earlier. Kudos.

Coin Toss

Give me an equity selloff! Just 20 percent. I'll settle for 10. Shake the tree, please. Maybe the "sell in May" catches some positive feedback effects or at least no new money enters the market and we start a slow bleed just in time for a geopolitical scare (North Korea, I'm looking at you).

Given the current state of the chess board, gold seems reasonably priced here +/- $15. Bias still slightly to the upside.