Despite dramatic price fluctuations, gold is still up about 25% this year. During the turbulent market on April 22, spot gold nearly touched an extraordinary $3,500 per ounce, demonstrating the metal’s relentless resilience. Since its peak on May 6, it has been given a serious dose of reality, falling as much as 1.6% and hitting $3,268 at its lowest. Analysts are waiting with bated breath for this Friday’s Non-Farm Payroll (NFP) report, probably the most important monthly indicator. This pivotal data might fuel another gold rally or it might drag the metal down further into the financial abyss.
Today’s trading landscape is a perfect example of the battle between the onshore and offshore markets. The result being that, even despite active trading, the net change in positions hardly budged. Spot gold in London is currently trading around $3,283, a dramatic swing considering the recent highs to lows. Gold’s trajectory could be completely changed by the next NFP report. Most are hoping that a terrible jobs report will suddenly show the weakness in the market’s foundation.
The Recent Surge and Subsequent Pullback
Gold’s anomalous performance this year has turned it into an unusual asset class. After the price reached a height above $3,500, it has since come down over 5% from that price point. Last week, call options flows in SPDR Gold Shares ETF accelerated into the ozone. This activity vaporized to an all-time high of 1.3 million contracts! This further underscores the bull market’s speculative activities and great interest in gold.
The recent blow-off top has created worries for investors, too. The metal’s quick climb down brought things back to where they should be, raising questions about whether that rate of growth could be sustained. While gold’s fundamental picture is still bullish, market analysts would advise caution given the rate of recent fluctuations.
“The ‘all clear’ crowd is getting complacent,” – analyst insight.
Gold prices are in the midst of a historic romp. Last week, three major Chinese brokers each trading over 212,000 equivalent lots of CME. This was only slightly below the year-to-date average of 240,000 lots on CME. It did little to advance equity overall, resulting in only slight improvements in their net equity positions. That type of activity shows that market participants are just moving in and out of trades while not materially changing their net exposure.
The Tug-of-War in Gold Markets
The continuing tug-of-war between onshore and offshore markets is important to know for contextualizing gold’s price action. Even the SHFE/CME volume-to-open-interest ratio has recently broken its historic high, showing the strength of this trading activity. When Chinese CTAs have to raise their trading volume, it forces them to keep their net exposure unchanged. This change in Shanghai sends waves straight to the ocean markets of London and New York.
This second dynamic exacerbates volatility and further strips power from buyers with real needs in favor of flow-based traders. The market today is as fragile as it gets. Supply and demand conditions are out of whack, creating conditions for rapid price increases and decreases. Investors would be prudent to keep an eye on the development of these three factors.
“If Friday’s NFP misses hard, the mask comes off for gold.” – market analysts.
The build-up to Friday’s NFP report simply adds to the nervousness and uncertainty blindly steering the ship. Market observers are already wondering if today’s report will act as a “gold kill switch.” The Federal Reserve’s approach to interest rate cuts is now contingent on the performance of jobs. Officials have signaled that when the jobs picture weakens substantially, that would justify cutting rates.
What Lies Ahead
While the market awaits the next NFP reading, specialists want to remind investors to stay careful and flexible. This new landscape makes it more important than ever to go long on good ideas while protecting yourself through smart hedging. As long as volatility remains, traders need to be prepared to rotate strategies at the first hint of a whiff.
“The Fed sets the stage. Waller practically spray-painted it: if jobs crack, cuts are coming.” – market commentary.