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Market Analysis

Fundamental Analysis: Gold Up Slightly On Mediocre US Data

May 30, 2019
BY Michael Stark

Gold moved up today in the early afternoon GMT after a range of somewhat disappointing figures from the USA. Meanwhile news of trade wars has caused volatility this week. However, sentiment appears to be recovering on the whole today.

Gold-dollar broke back above the important area of $1280 for a troy ounce. Gains were a bit bigger against other currencies, mainly XAUEUR above €1150. Gold has also reached £1014 and A$1850 at the time of writing.

American data and trade wars

This afternoon’s data from the USA was generally slightly weaker than expected. The second estimate of GDP growth for Q1 was down slightly to 3.1%. GDP price index at 0.5% was also marginally below the consensus, and initial jobless claims were up 4,000 to 215,000.

Weaker American data usually supports gold for a few reasons. The main one is that the metal is most commonly priced in dollars. Traders expect that a slow American economy eventually makes it cheaper for most investors to buy the metal. This is because they can buy more dollars with their local currency. Another important factor is that gold usually functions as a haven that gains during periods of less impressive growth.

Gold’s correlation with shares has been weaker recently, but this week’s downward movement by American indices does seem to have provided some support. The main issue affecting risk appetite yesterday was China’s fresh threat to extend tariffs to rare earth metals. This hurt sentiment on many American shares because of these commodities’ importance for major technology companies.

‘Risk-off’, but no real selloff yet

Gold hasn’t made any significant lasting gains this week, in part because of the dollar’s strength. USD’s performance against most hard currencies has been good over the past few days. In fact, the dollar has actually posted gains against some havens. USDJPY is up 30 sen today, a gain of nearly ¥0.70 since yesterday’s open in Tokyo.

American shares also moved up somewhat from yesterday’s lows. The Dow, Nasdaq, and S&P 500 have each gained about 1.5% since last night in New York. On this basis, sentiment does seem to be improving somewhat.

As usual, rates remain a factor against gold. Selling XAUUSD as a CFD continues to generate a relatively high carry because the metal does not yield any interest.

Range of data in view tomorrow

Tomorrow’s a big day of data for most major currencies around the world. The most important release for gold is from China, though. NBS manufacturing PMI for May is first up at 01.00 GMT. The expectation is for more of the same at about 50.1, which might be slightly negative for gold.

Other releases include American personal spending and income at 12.30 GMT. Gold traders will probably also watch German annual inflation at 12.00 plus Canadian GDP at 12.30. These figures could give some indication of the near-term outlook for growth in some of the world’s biggest economies. Such information might drive a bit more direction for the yellow metal tomorrow.

Beyond economic data, events in stock markets could be a factor into next week. Although gold’s inverse correlation with shares has been much weaker over the past few weeks, traders should not ignore the performance of major indices.

Traders often look at bond markets during times of economic uncertainty for clues on future movements for havens. However, the so-called correlation between yields from American ten-year government bonds and the price of gold is highly unstable. A break below 2.2% for US 10Y might suggest gains for gold, but traders should not focus too much on this.

Gold could keep moving up

Based on current fundamentals, a small gain seems to be likely for gold into the end of the week. However, traders should be sure to watch tomorrow’s data and movements by shares. Equally, the large number of news factors affecting gold means that traders would be remiss to ignore the technical picture.

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