Gold broke but could not hold the 200 DMA at $1,262 Monday, and we are viewing that as a technical failure here. It is the first time since Nov. 10 that we have looked at the other side of that fence, so there is still some encouragement to be gained from the experience.

A combination of slightly dovish FOMC minutes, Treasury Secretary Steven Mnuchin comments and perhaps a bit of lost faith in our month-old presidency, and we seem to be — at the minimum holding onto the year's gains, even if further headway is proving difficult.

The dollar found some strength Monday afternoon, and the market all of a sudden repriced March hike odds from 40 to 50 percent, but I'm not sure if we can hold on to that, given the week's busy calendar ahead. I think by Friday's close we will have a much better indication of the Fed's bias for the March 15 meeting.

Week Ahead

  • Trump talks to Congress at 9 p.m. ET tonight. Can't yet decide if that's a bourbon or Japanese whisky moment.
  • Today: Fed nonvoting Cerberus of Harker, Williams and Bullard speeches
  • Robert S. Kaplan tomorrow (Go Dallas Fed), as well as PCE, Personal Income and Beige book
  • Janet Yellen Friday, with Charles Evans, Jeffrey Lacker and Stanley Fischer as the undercard

Bull Case

  • Mascot paradigm: 2003-2006 rate hike cycle, wherein the FOMC is behind the curve and too dovish. Asset prices rise, yields rise some but not enough. Stocks, rates and gold all go higher, with the DXY down slightly over that period from 90 to 85.
  • Dollar long is a crowded trade, particularly against the yen, and that usually ends in somebody's tears.
  • The details of the FOMC minutes made clear that this Fed views natural shrinking of the balance sheet as a form of tightening and allowing market rates to rise even without a hike. Hiking less likely.
  • Geopolitical uncertainty, doomsday clock and national debt.
  • Spec positioning leaves plenty of room for further upside participation, and there seems to be plenty of short gamma even with gold vols at/near two-year lows.
  • Gold at least seems well supported at $1,250, with moving averages at $1,215 and $1,200 as well.

Bear Case

  • Mascot paradigm: Last year. Actual rate hikes or even their looming specter juice the dollar and hurt gold.
  • Counterpoint to above: Even if the Fed does nothing, the balance sheet will be shrinking gradually, which is a form of tightening. [Dusts off three years ago] "Tapering is tightening."
  • Lots of technical resistance from above, with 200 DMA at $1,260, $1,295, top of channel and $1,308 the pre-election high close.
  • Yesterday was a miserable failure. We had some mediocre data, yet strong dollar flows knocked us $10 off the 200 DMA toehold.
  • Coin and bar demand is ... not good, especially for silver. This is a long-running indicator with low timing correlation but high consistency in eventually being proven true.
  • $110 rally needs a breather at best and a correction at worst.

Chart 1

Implied one-month vol for gold (white), equities (VIX = orange), oil (blue). It's not just metals that's got the low vol symptoms; it's basically all of macro. I think this is unlikely to change unless something other than Donald Trump dominates the news cycle. We could very well get that this week, but it's always hard to forecast the breakout, so you just collect carry and hope for the best.

Coin Toss

Mostly because of short dollar positioning, not much spec length and a Fed that is likely to surprise to the dovish side if anything, the bias is still higher. I am looking for Fed speakers to talk this week about how doing nothing is actually tightening because of potential shrinking balance sheet due to market securities maturing.