The Daily Prophet: Start Paying Attention to Gold

Connecting the dots in global markets.

Gold is breaking out, and that's not necessarily a good thing. The precious metal has tested the $1,300 an ounce level three times since April. On Monday, it burst above what had come to be seen as a pretty strong area of resistance. This appears to be more than a "technical" move. Instead, it smacks of fear in the markets.

While the naysayers may attribute gold's strength to a weaker dollar, the fact is that the greenback has been weakening all year and yet gold has been unable to rally. It's probably no coincidence that the latest move higher coincides with reports of discord among the highest-level staffers in the Trump administration over the president's response to violence in Charlottesville, Virginia. Or it could be powered by reports that North Korea is making progress on its nuclear missile program. Or the mounting concern that Washington lawmakers will trigger a technical default on U.S. debt by not raising the debt ceiling on time and shutting down the government. Or that the hurdles to tax reform anytime soon look increasingly insurmountable. Or that the special counsel Robert Mueller's probe into the Trump campaign's possible ties to Russia is gathering steam. Or that the stock market is priced for perfection.   


The list of worries could continue, but the point is that there's no shortage of risks facing investors. The latest weekly positioning data from the Commodity Futures Trading Commission show that money managers are the most bullish on gold in 11 months, while bearish positions are the smallest in almost five years. The billionaire Ray Dalio, who leads the world’s largest hedge fund at Bridgewater Associates, recommends investors consider placing as much as 10 percent of their assets in gold. Francisco Blanch, the global head of commodities research at Bank of America Merrill Lynch, said last week gold is on track to climb to a four-year high of $1,400 an ounce by early next year.

MORE EVIDENCE STOCKS MAY BE BREAKING DOWN
Not everything in markets is about fundamentals. Asset prices often move based on trading patterns. Now, one prominent market watcher is sounding the alarm over U.S. equities based on such "technicals." Thomas J. Lee, the managing partner at Fundstrat Global Advisors, is worried about the percentage of New York Stock Exchange-listed shares trading above their 200-day moving averages. As Lee sees it, the problem is that the percentage fell to less than 50 percent within the past two weeks. After two dozen similar declines since 1994, the S&P 500 almost always ended up at or below its 200-day average, Lee wrote. To reach its average, the index would have to slip 3.6 percent from Friday’s close of 2,443.05. Here's why you want to listen to Lee: He had the most bullish forecast for the S&P 500 for most of last year among the 20 or so strategists surveyed by Bloomberg News. He ended up being right, with the S&P 500 ending the year at 2,238.83, compared with Lee's forecast of 2,325, a difference of 0.2 percent. His 2017 forecast is for the S&P 500 to end the year at 2,275, or 7 percent below its closing level of 2,444.24 on Monday.


EURO FEVER GRIPS CURRENCY TRADERS AS STOCKS SUFFER

The shared currency's relentless march toward the psychologically important level of $1.20 continued Monday, as it rose as high as $1.1984. The latest leg higher was spurred by European Central Bank President Mario Draghi's comments Friday at the Federal Reserve's annual retreat in Jackson Hole, Wyoming. To be clear, it wasn't what Draghi said, but rather what he didn't say. The betting was that Draghi might say the euro's surprise rally this year was unwelcome. But when he didn't address the currency, traders took that as a green light to keep pushing it higher. How unexpected have the gains been? Consider that at the start of the year, none of the 100 or so strategists surveyed by Bloomberg forecast the euro to be trading at this level at this time. Although the euro's gains are seen as a reflection of the region's improving economy, stock traders are increasingly worried its strength could hurt exporters, which is one of the main reasons why the STOXX Europe 600 Index has done so poorly in recent weeks as the currency continued to rise. Their pain may not be over. Draghi’s decision to refrain from pushing back on the euro’s strength paves the way for it to reach $1.22 by year-end, according to Credit Suisse currency strategist Shahab Jalinoos.


HURRICANE HARVEY FOSTERS HAVOC IN COMMODITIES MARKETS
The fallout from the strongest storm to hit the U.S. since 2004 reverberated through the commodities market, touching everything from oil and gas to cotton to cows. Motor fuel prices rose as much as 6.8 percent and oil in New York slipped 2.6 percent as flooding caused plants to shut, taking offline about 2.26 million barrels a day of crude and condensate capacity in Texas, according to Bloomberg News' Jessica Summers. Several pipelines were also closed, potentially stranding crude in Texas and interrupting gasoline supplies to other parts of the country. Cotton on ICE Futures U.S. in New York rose as much as 2.6 percent to 69.95 cents a pound Monday as the storm hit Texas -- the largest U.S. cotton producer -- even as many farmers are storing excess supplies on fields following a bumper harvest, according to Bloomberg News' Jen Skerritt and Brian K. Sullivan. The deluge of rain has left some animals stranded in floodwater in the state that leads the U.S. in beef production. Cattle futures on the Chicago Mercantile Exchange rose as much as 2.6 percent Monday, reaching the highest price in almost three weeks.


EMERGING MARKET BOND FLOWS APPROACH KEY MARK
Despite warnings from some of the world’s largest money managers, such as Pacific Investment Management Co. and T. Rowe Price Group Inc., that it's time to trim holdings of emerging-market assets, the cash just keeps on flowing in. According to Morgan Stanley, debt funds focused on developing nation assets have now taken in about $47 billion since February. That's significant because it means inflows are just $2 billion shy of matching the previous strongest surge, which occurred in 2012, despite taking 20 fewer weeks to do so. The appeal of emerging markets lies in the first synchronized upswing in the global economy since 2007. That has allowed the foreign-exchange reserves in the 12 largest EM economies, excluding China, to rise to $3.05 trillion from $2.89 trillion at the end of last year. The $157 billion increase is already the most since 2012. All the money flowing into these markets means that for only the third time in history EM bonds are yielding less than U.S. junk bonds, according to Bloomberg News' Ben Bartenstein.


TEA LEAVES

Despite the turmoil in Washington, U.S. consumer confidence has trended higher this year. While a strong labor market and the gains in stock prices are no doubt a big contributor to the positive sentiment, it will be interesting to see if things have changed in the wake of the most recent political discord. We'll find out Tuesday, when the Conference Board releases its monthly consumer confidence index for August. Although the median estimate is for little change in the index at 120.9 versus the July reading of 121.1, the economists at Bloomberg Intelligence note that the survey collection period ended on Aug. 16, so it likely included a significant portion of responses after the Charlottesville protests and subsequent disbanding of the president's business councils -- the Strategy and Policy Forum and the Manufacturing Council.

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