Michael Hartnett at BofA has a warning for gold bugs:
Sell gold: gold returns negative 7/10 times after last hike, avg-13% returns 3 months post last Fed Hike in inflationary cycles…love gold long-term but if dollar has risk-off, gold back below $2000.
The Market Ear has more on gold market positioning:
Gold’s fear hedge revival
Gold as a substitute for VIX and a global fear hedge has made a strong comeback. Haven’t seen this in a long time…
Gold loving the regionals crisis
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Nobody talks about gold
Media attention is busy with talking AI and KRE. Gold getting very little attention…but that 2050/70 resistance is huge.
but you are not early
Gold has performed very well, especially this last push higher, but gold is trading at huge levels up here. 2050 is the big “close” level to watch. Yesterday’s panic overshoot has similarities to the 2022 panic print at pretty much same levels. Note the big trend channel that has been in place since gold bottomed out.
Gold’s real yields gap
Gold is much more than a real yields play only, but that gap should keep you on the alert should we get another move in real yields going like we did in February.
Use gold volatility
Regular readers of TME are familiar with our logic outlined a few weeks ago where we have argued for using relatively cheap gold volatility to play possible upside moves. This has played out well. Given the latest move higher in the GVZ, we would use the opposite here, i.e look at using elevated gold for various strategies, one of them being overwriting “must be longs”.
There is also the very extended EUR bid to consider. It is the key input into DXY and if it reverses then gold will come under more pressure. Deutsche has more.
Our bullish EUR/USD view for this year has rested on two pillars: that the market was underpricing the positive European outlook and that the next big move in US Fed Fund expectations would be down rather than up. With both the Fed and ECB meetings now out of the way and EUR/USD reaching our 1.10 mid-year forecast, it is a good time to assess where we stand. Our conclusion is that the positive European story has now largely been priced in. For the next move higher in EUR/ USD, negative dollar drivers will have to kick in.
The simplest evidence of how far the euro has come is the trade-weighted index. It is now sitting close to all-time highs and has reversed the entire drop from the War (chart 1). The euro is certainly not expensive given that the real effective exchange rate is far below its all time highs. But from a cyclical perspective, the impact of last year’s energy crisis has been unwound. The message from European equities is similar – they have reversed the drop from last year and now sit close to their multidecade highs. It has taken a long time to convince the market that a 4% ECB rate is possible but market pricing is now at levels that we have argued are reasonable too.
That EUR/USD is closer to 1.10, rather than 1.20, despite this, positive repricing speaks to the strength of the dollar. It is only 1% weaker in trade-weighted terms since the start of the year. For our ultimate 1.15-1.20 EUR/USD target to materialize, we therefore need to see weakness driven by the dollar leg. What are the relevant drivers? First, more evidence that US inflation is coming down allowing the US yield curve – a key indicator of dollar direction – to steepen even more, though its shape is already sending a bearish signal. Second, an ultimate validation of dovish Fed pricing from Fed communication itself. The dollar uptrend in 2021 was kicked off by Powell’s first hawkish pivot in June and the second one in December.
Putting it all together, our dollar view since the start of the year has been tracking well and we take profit on our long EUR/USD trade recommendation. For the euro to keep rallying, it is now much less about the ECB staying hawkish but rather the Fed pivoting dovish. As we have long been arguing, the relative European-US cycle is more consistent with an interest rate differential that is close to zero. This will increasingly have to come from US yields moving lower.
The difficulty in coming months will be assessing the nature and timing of the turn in the US cycle. A turn that is dominated by a banking and debt ceiling induced recession, and risk aversion will still result in a weaker dollar, as shown by Robin Winkler, but one that is more concentrated in gold, JPY, CHF and EUR (chart 2). A turn dominated by stable equities and a soft-landing in the labour market – as evidenced by the recent sharp drop in the quit rate but not by the just released solid labour market report – will allow for much broader dollar weakness (chart 3). It is to these questions we will turn in our upcoming summer FX Blueprint. For now, we are happy to take profit on the euro long.
My own view is that gold is a classic buy-the-dip market here. Hartnett is spot on that if the US small bank crisis really gets moving then DXY is going to bounce and gold fall.
That’s the time to buy with both hands, as it was in the GFC: