Gold and silver are hanging somewhat precariously with some of the recent extreme momentum having come off a bit, and both the ETFs and futures markets turning into slight net sellers. I can make an argument either that it’s a respite for another leg higher (prices haven’t collapsed despite spec redux), or that we have a long way to go should buying support not emerge.

I think the headlines, largely from central banks will be the determinants here, and all eyes are on the Fed in particular to see how they respond to the two incredibly noisy jobs reports we have seen recently. The net balance of econ data versus expectations has turned positive for the first time in 19 months and capital markets seem a little less twitchy, but doubtful that it’s enough for the Fed to firmly plant their hand on the very hot rate hike stove again.

They’ve been burned before by creating expectations of a future rate hike only to lose credibility when it didn’t materialize. I’d expect them to depend less on a meeting comment to set expectations and more on the few weeks before the desired meeting.

Bull Case

  • $10 trillion in global sovereign negative interest rates. I say it every week because it is still the biggest game in town. For perspective, the U.S. investment market cap is said to be something like $33 trillion.
  • Fed not raising rates just yet. Two still possible (:data dependent"), though one in December alone much more likely.
  • RSI has moderated with the selloff from 1375.
  • Asian demand has resurfaced a bit with some Far East bids reappearing.
  • With equity markets at highs and corporate earnings season in full swing and looking very underwhelming, does that promote risk reduction?
  • Call skew moderating, so new bullish bets are getting a bit cheaper. May see some crazy call fly action in the coming weeks if this keeps up.

Bear Case

  • Gold ETFs redeemed 145k oz yesterday. Has the tide turned?
  • 2yr rates moving significantly higher to 75 bps (from sub 60) could turn into a problem.
  • COMEX gold roll almost done and futures specs will continue to look at the contango carry that longs have to pay to play (1.8% currently to Dec.)
  • CFTC positioning, while still extreme, has been reduced for the last 2 weeks in a row.
  • BoJ FinMin Taro Aso poured cold water on speculation of increased financial stimulus → though stronger yen can also support gold.
  • Any hawkish comments on Wednesday from Yellen could re-price expectations quickly and there is lots of room to go.
  • Inbound refining volumes and producer hedging stronger.
  • Physical retail coin and bar demand very weak.
  • Gold has significantly outperformed the USD ever since the Brexit vote.
  • U.S. and World equities at or near all-time highs depending on your index and VIX at 1 yr lows.

Chart 1

Yen Dependent. Gold (white candles) has significantly outperformed the DXY (yellow, inverted) since the February rally, and especially so since the Brexit vote put a hurt on EUR and GBP. The purest indicator of how much of gold’s performance has been anti-dollar, then, is through the Yen.

The BoJ just can’t seem to catch a break. They are buying some 90% of net new debt issuance in Japan and monetizing it and traders still buy the Yen v. nearly everything else in the universe right now. All Abe, Aso and Kuroda want is a weak Yen to stimulate manufacturing and investment, but their poor demographics (worst in the world) seem to be blocking the way. State mandated triple short yen ETFs next on the list?

Chart 2

Implied probabilities of rate hikes (low). As seen in the yellow line at bottom, July hike was a 40% probability for a while in the run up to the Brexit vote, and then became effectively dead. It’s off the lows but more of a "Weekend at Bernie’s"-type undead than a Lazarus.

Market still less than 50% of a single hike this year. If the data stays bullish on the U.S. economy, that can re-price quickly. I have zero intuition into how the Fed views the presidential election, and I would be very surprised to hear them comment candidly. Barring catastrophe, a single hike in December still seems the base case, but a lot can happen between here and there.

Coin Toss

In a vacuum, I think the balance of physical supply and demand is very bearish (one leg of the stool gone), combined with CFTC positioning still at extremes and the EFP in steep contango all the way to December, there is a massive amount of spec length in the market and not a lot of shorts left to cover.

Without a significant Yen rally v. dollar, I have a hard time seeing gold higher here. I suspect we may be forming a multi-month range of 1305-1375, but the risk of the bigger/faster move is absolutely to the downside so: lower.

Have a great week. Peak vacation season, so I’m writing every other week until mid-August or so. Five weeks to the best opening weekend of college football ever.