Gold Glimmers, But Silver Shines | Daily Market Commentary with Jeffrey Halley
Gold staged an impressive two per cent rally overnight, overcoming $2000.00 an ounce on its way to $2020.00 an ounce overnight high. Lost in the noise yet again though was the silver outperformance leading gold higher. Silver rose 7.0% to at $26.0000 an ounce. With the gold/silver ratio reverting to its long-term mean, a phenomenon that economists drool about, the ratio is not yet even remotely oversold on a monthly basis.
That implies that silver has more potential upside than its big brother. I note that gold is trading at record highs. Silver is trading at $25.8300 an ounce this morning, with its record high being in 2011 around $49.8000 an ounce. Before gold bugs globally, try me on the sacrificial altar of social media, both metals can, and likely will, continue to rise. Silver may just surprise everybody though, with its potential for outperformance, even at these lofty heights.
The US Dollar sell-off resumed overnight after a one-day hiatus. The usual suspects were at work. The US yields out to 10-years fell again, pushing real rates deeper into negative territory, and lack of progress by the House and Senate on a follow-up fiscal stimulus package. That, off course, was also the primary reason for the jump in precious metals. But it also supported energy prices after US crude inventories recorded another massive drop overnight.
Services PMI’s have been released across Asia today, with the data again, either improving or maintaining expansionary territory. The results though, were more underwhelming than exhilarating, in contrast to the manufacturing PMI’s on Monday. China’s Caixin Services PMI notably fell to 54.1 from last month’s 58.4. That implies that the pace of improvements is slowing and the data in general highlights that employment and spending on services by domestic economies remains challenging, even as manufacturing recovers.
Indonesia will release its Q2 GDP at 1200 SGT, with GDP expected to have contracted by around 4.0% YoY. With Covid-19 remaining in full flight across Java, and social restrictions being extended endlessly, (where the author is based), Q3 is unlikely to show much improvement. Most of that bad news, though, is priced into Indonesian markets and the currency for now.
Singapore Retail Sales today are expected to paint an equally grim picture. The easing of circuit breaker restrictions will not have got Singaporean consumers to open their pockets for anything other than necessities. Consumer spending was already dire ahead of the pandemic, with the economic slowdown and job losses exacerbating the situation. There is unlikely to be a recovery in the City-state until later in Q4 at best.
The Bank of Thailand releases its latest rate decision this afternoon, with the BOT expected to remain unchanged at 0.50%. The central bank has already telegraphed it had finished with easing, and the decision should not be market moving. The Thai Baht, having outperformed over the past three weeks versus the Dollar, will struggle to strengthen past 30.80, even with a weaker greenback globally.
In the US this evening, ADP Employment and ISM Non-Manufacturing PMI. Both will be closely monitored, the ADP for clues as to the outcome of Friday’s Non-Farm Payrolls. Non-Manufacturing PMI to alleviate, or increase, concerns over a potential double-dip contraction in the US. Either, or both, data prints have the potential to move markets quite strongly one way or the other.
Asian equities follow Wall Street’s lead.
A weaker US Dollar and lower US yields boosted Wall Street overnight, and has similar results for most regional markets today, which seem content to coattail a positive overnight Wall Street session. The S&P 500 rose 0.38%, the Nasdaq rose 0.35%, and the Dow Jones rose 0.62%.
The Nasdaq should be monitored closely at these levels. Although it touched a marginal record high overnight, it still appears to be tracing out a triple top on the charts. A failure to close well North of present levels by the week’s end ratchets up the odds that a stock market correction is near. Before I receive screeds of panicked emails, the underlying drivers of the stock market rally remain stronger than ever. Any fall will be corrective, and not the top of the market.
Asia is mostly in the green, with only Japan and Australia falling. The Nikkei 225 has declined 0.20% after the Yen strengthened overnight. In Australia, record Covid-19 cases in Victoria today is sapping confidence that Australia’s recovery will not hit a pandemic wall. The ASX 200 has fallen 0.45%, and the All Ordinaries has declined by 0.65%.
Elsewhere though, the story is positive. In China, the Shanghai Composite is up 0.30%, with the CSI 300 up 0.15%. Hong Kong is 0.60% higher, with Singapore 0.70% higher. Jakarta has risen 1.30% ahead of today’s GDP data, with Kuala Lumpur having a quiet session, up just 0.20%.
Trading appears directionless across most of Asia today, with equity markets content to await the heavyweight data out of the US this evening for more direction. Despite the noise, this week has a consolidative, range-trading look about it ahead of Friday’s US Non-Farm Payrolls, as we also await progress from Washington DC on the next fiscal stimulus package. Noisy, but ultimately, directionless trading intra-day is set to continue.
The US Dollar sell-off unconvincingly resumes.
US yields eased lower again overnight, notably at the front end of the curve where the 5-year hit record lows. That in turn fed through to currency markets, where the US Dollar sell-off resumed after the briefest of breaks. Again, it was most noticeable vis the major currencies, with EUR, GBP, CHF and the commodity group all recording modest gains of around 0.50%.
The dollar index eased 0.30% to 93.26, leaving it parked in the middle of the past week’s trading range. EUR/USD has recaptured 1.1800, with GBP/USD rising to 1.3100 again. Again though, the gains versus the Dollar were unremarkable, suggesting that price action remains consolidative rather than trending. We will probably have to wait for the US Non-Farm Payrolls on Friday for fresh direction.
Many of the majors are tracing out what appears to be topping patterns on the charts. Notably, EUR/USD, AUD/USD and NZD/USD. That could be hinting that the US Dollar correction still has more to run before the downtrend resumes again in earnest.
The picture is less clear among Asian currencies. Having lagged the initial US Dollar sell-off, most regional currencies have continued to outperform this week. THB, MYR and SGD have all continued to gain versus the greenback, likely boosted by improving PMI data across the world on Monday.
Notably, the Chinese Yuan has hit 5-month highs, with USD/CNY and USD/CNH falling to around 6.9550 today. China data has most certainly played a part, as have inflows to a buoyant stock market. Having broken 6.9650, USD/CNY seems poised to strengthen further, possibly as far as 6.9200 in the coming week. Only a strong comeback by the US Dollar versus the major currencies calls that premise into doubt, with its knock-on effects on the CNY basket.
US API Inventories lift oil prices.
A weaker US Dollar continued to put a floor on oil prices overnight, but it was the US API Crude Inventory data that propelled them higher. API Crude Inventories fell by a massive 8.60 million barrels, following on from last week’s 6.80 million falls. That lifted Brent crude by 1.1% to $44.30 a barrel, and WTI by 1.70% to $41.60 a barrel. Both contracts remain unchanged in another dull Asian session.
All eyes will now be on official US Crude Inventory data tonight, following its equally impressive 10.6 million-barrel fall last week. Crude Inventories are expected to fall by 3 million barrels tonight; however, the API data suggests it could be quite a lot more.
A much larger fall will all but confirm that US oil production has fallen materially, by possibly millions of barrels a day. That could be enough to overcome Covid-19 slowdown fears, and force oil prices higher, and out of their one-month summer doldrums.
I should emphasise though, that despite the moves higher overnight, both Brent crude and WTI remained firmly ensconced in their one-month ranges, as their long summer of love continues. Critical resistance remains at $45.00 a barrel for Brent crude and $42.70 a barrel for WTI. In WTI’s case, this is now also its 200-day moving average.
Only a strong close above these levels signals that oil’s bullish uptrend has recommenced. Until that is confirmed, possibly tonight, both contracts remain in range-trading mode. Traders should take care not to confuse hope with reality.
Gold and Silver rally aggressively.
As previously stated, gold broke $2000 an ounce overnight, climbing to a new record high at 2020.00 an ounce. Silver, in the meantime, rose an even more impressive 7.0% to trade at $26.0000 an ounce. Lower US yields and an ensuing weaker US Dollar was all the cues markets needed to force both metals higher.
The bullish cash remains overwhelming for both metals, even at these lofty heights. US real yields continue to fall deeper into negative territory, with a slather of Covid-19 and Washington DC impasses thrown in for good measure.
Pullbacks are possible from here, quite possibly deep ones; especially if the Dollar corrects higher on the currency markets versus the majors, as the charts suggest. Both precious metals, though, should find plenty of willing buyers on dips to $1980.00 and $24.0000 an ounce respectively.
Silver’s next upside technical targets are $28.0000 and $32.0000 an ounce. Gold is in uncharted territory, and so I will pick $2100.00 an ounce as a nice round number. I am continuously asked how high gold can go; such is the target and data-driven world we live in now. That, to me, is a fool’s errand. Suffice to say; as I glance at the government deficits and the size of quantitative easings globally, my answer is that gold can go higher, much higher. Beware of the potentially emotional pullbacks within the longer-term trend, however. The next major stock market sell-off will test investors’ precious mettle (sic) for sure.