Feb 2023


Feb 2023

StoneX Bullion round-up Monday 6th February 2023

By StoneX Bullion

Strong U.S. labour figures throw gold into reverse.

Once again it was all eyes on the United States in the gold and silver markets last week. The Federal Open Market Committee (FOMC) meeting concluded on Wednesday with a 25-point hike in the fed funds target rate, to 4.50-4.75%. This was much as expected, but what did take the markets by surprise was Mr. Powell’s mild tone at the Press conference. He pointed up three different sets of inflationary forces: goods, housing, and services excluding housing.

He said that disinflation (as distinct from deflation – disinflation is a reducing rate of positive inflation. Deflation is outright negative) is already in place in the goods sector and is “in the pipeline” in housing services and these two areas between them are just over half the U.S. measures of inflation.

Where we are still waiting for any sign is in the third sector, i.e., services without housing services. Judging from the NonFarm Payroll figures for January (see below) we may have to wait a while longer.

He also pointed, however, to the fact that hourly earnings continue to rise and that the labour market remains strong, with unemployment at 3.5% (and that changed later in the week, see below).

So, at this stage of the week gold was still in bull mode and Mr. Powell’s overall tone and quite positive stance helped boost prices up towards $1,960, a gain of 20% from the trough in mid-November. Technically the definitions of a bull market include a gain of 20% and so it is arguable that in mid-week last week gold was in a technical bull market.

Then, as if foreshadowed by Chair Powell’s words about the labour force, the January NonFarm Payroll figures, released later in the week, were a lot stronger than the markets had been expecting, with a gain of 517 thousand (well ahead of expectations of 187 thousand) and unemployment dropping to 3.4%, the lowest in 53 years. The recovery in the services sector was a key driver here. Offsetting this slightly was a slowing in wage growth, at 4.4% in January against a revised 4.8% in December, while the average working week was at a 22-month high.

These numbers saw a rally in the dollar while gold dropped right out of its bull channel with two consecutive days’ decline, with spot dropping to $1,860 on Friday before some small buying interest at the start of this week. From a technical standpoint the price is now below the 10 and 20-day moving averages at $1,912 and $1,920 with support offered by the 50-day average at $1,850.

In other major currencies such as the euro, Swiss franc and yen, gold’s recent bull run has also come under attack, but the trendlines have not been badly severed and prices are trying to clamber back over support.

This market reaction does look dramatic, but the support at the lower levels is encouraging for the bulls. It does demonstrate, though, how incredibly sensitive the market is at the moment to any element of U.S. economic activity and what it might mean for the interest rate cycle. Current sentiment is that there will probably be two more hikes – certainly this is what the bond market is looking at. Currently the bonds are discounting peak rate of 5.1% in June this year.

There was liquidation in gold Exchange-Traded Products over the week, to give a cumulative redemption so far this year of 22t, for an annualised rate of 227t, more than twice the overall net sales last year.

Meanwhile the gold:silver ratio widened, as is usually the case in a bear move, with silver dropping below $22.50 having been over $24.50 immediately after Mr. Powell’s Press Conference; this means that the upward re-rating that silver enjoyed in December has now been unwound, although there does appear to be a body of support between $21 and $22.

There was some buying interest in the silver ETPs at the end of last week, implying some bargain hunting. Certainly, a fall of 9.6% in two days should be enough to entice some interest into the market and it looks as if this has materialised, albeit in small volume after some reasonable selling mid-week.

Spot Gold, technical annotations

Spot gold, in major currencies

US fed funds implied overnight rates

EU bond markets implied rates

The U.S., E.U. and China yield curves

Gold, the dollar, and their correlation

Gold (inverted) and the two and ten-year yields; correlation with the 10Y