The first round of the French election pretty much went the way that risk markets were hoping for. We have since seen the dollar sell off to a post-election low of 98.7, particularly against the EURUSD (1.07 to 1.095), with equity markets rallying, rates moving higher and a general risk-on sentiment.

Most equity indices are within a hair of their prior all-time highs, and even base metals get a respite from their role as April's circus monkey. Gold and silver are off roughly 2.5 percent and 4 percent, respectively, and there is a bit more room until we get to respectable technical support levels at $1,250 range.

Bull Case

  • Dollar weakness. The DXY is off almost 3 percent since the March highs. USDJPY correlation with gold is still 82 percent on a 40-day basis. Hope?
  • Slew of economic data has been fairly weak in aggregate.
  • Rate hike expectations are easing somewhat with the odds of two more hikes this year being just below 50 percent.
  • ETFs continue to add length. The GLD holdings alone are up 2.8 percent or almost 700K ounces in April.
  • Lots of support around $1,250.

Bear Case

  • Risk-on: equities, rates, currencies, even base metals are higher with most corresponding safe havens lower.
  • Physical demand is weak and doesn't show any signs of improving anytime soon.
  • Momentum is clearly to the downside, and we are nowhere near technically oversold yet.
  • Silver is still a crowded long market from the spec community.
  • Contango rates remain elevated for spec longs. Nice carry for shorts.


  • Vols are challenging cyclic lows. One-month breakevens for gold are around $8 range per day. That may entice some long gamma bets.
  • Time doesn't kill rallies, but changes in monetary policy do. Reducing FOMC balance sheet and two hikes may be enough to stall the recovery.
  • Q1 GDP estimates at 1 percent — low bar, and apparently everyone is on board with our Q1 seasonal weakness. Still the headline number (especially real GDP) may give some pause.

Chart 1

Gold six-month implied vol (at the money) is at lows since August 2005! Silver one-year at 22 percent implied versus 20.5 percent 2014 lows, and 2004 is the low before that. If there is any consolation, it is that typically once vols hit lows, they tend to mean revert within a month or two, sometimes drastically.

To adapt a metaphor we use around here, long-tenor vols tend to be stairs down and elevator up. Similar charts exist across the macro space whether equity VIX, crude oil or currencies. Until we get some sort of catalyst (likely monetary policy), no one seems to have a reason to change asset price assumptions.

Chart 2

Gold really likes $1,250. The distribution chart on the left side shows time at price for spot gold since the beginning of 2016. With the upper range of the down channel (green) still intact, the mid-range is, you guessed it, $1,250.

We also have the 200 DMA at $1,254 and the upward-sloping 50 DMA at $1,247. True technicians (and ZeroHedge) will almost certainly have headlines that those two crossing will be a bullish signal, with the last time this setup occurred being February of 2016, halfway through a tidy six-month rally, but the macro backdrop will have to change for any meaningful upside just yet.

Coin Toss

We remain constructive on gold prices long term with accommodative policy still in place and financial conditions actually easing since the rate hike cycle began, but difficult to get bullish here in the short term. We will need to consolidate around $1,250 and have some other macro inputs take a breather before we can resume any meaningful run back to $1,300. Lower.