Gold rebounds on revived risk aversion, softer dollar

OUTSIDE MARKET DEVELOPMENTS: Market sentiment has swung back toward risk aversion as the euphoria associated with the UK trade deal and tempered tensions with China is wearing off. Markets are craving further progress on the trade front.

Ukrainian President Zelenskyy is in Turkey, ostensibly for direct peace talks with Russia. However, the Kremlin has confirmed that President Putin will not be there. President Trump had suggested his attendance was contingent on Putin being there. It appears these will be much lower-level talks than many had hoped for, dimming the prospects for a deal.

Trade optimism earlier in the week pushed the dollar index to a five-week high near 102. The greenback got some additional underpinning from a Bloomberg report that said U.S. officials were not pursuing a weaker dollar as part of trade negotiations.

U.S. PPI for April stunned with a 0.5% drop, the first negative print in 18 months and the largest in five years. This, combined with the rolloff of the +0.5% print from last April, results in a full percentage point drop in annualized PPI from a revised 3.4% in March to 2.4%. Core PPI tumbled to 3.1% y/y from a revised 4.0%.

Combined with weaker-than-expected CPI in April, there is mounting evidence that inflation risks are no longer a credible excuse to not cut rates. I expect President Trump to say something to that effect today.

So far, the reaction in Fed funds futures has been tepid. The market has priced in 50 bps of easing by year-end, with the first cut likely to come in September. Powell speaks today on the ongoing monetary policy framework review.

Retail Sales rose 0.1% in April on expectations of UNCH, versus a positiive revised +1.7% in March ( was +1.4%). Ex-auto +0.1%, below expectations of +0.3%, versus a revised +0.8% in March (was +0.5%).

PPI -0.5% in April, below expectations of +0.2%, versus an upward revised UNCH in March (was -0.4%); 2.4% y/y, down from an upward revised 3.4% in March (was 2.7%). Core -0.4%, below expectations of +0.3%, versus an upwardly revised +0.4% in March (was -0.1%); 3.1% y/y, versus a revised 4.0% in March (was 3.3%).

Initial Jobless Claims were steady at 229k in the week ended 10-May, above expectations of 226k, versus a revised 229k in the previous week (was 228k). Continuing claims rose 9k to 1,881k in the 03-May week, versus a revised 1,872k in the previous week (was 1,879k).

Philly Fed Index rebounded 22.4 points to -4.0 in May, above expectations of -10.0, versus -26.4 in April.  Prices paid continued to march higher, reaching a 35-month high of 59.8.

Empire State Index fell 1.1 points to -9.2 in May, inside expectations of -10.0, versus -8.8 in April. "Firms continued to expect conditions to worsen in the months ahead," according to the NY Fed.

Industrial Production was UNCH in April, below expectations of +0.2%, versus -0.3% in March. Cap use edged down to 77.7% from 77.8% in March.

Business Inventories rose 0.1% in March on expectations of +0.2%, versus +0.2% in February.

NAHB Housing Market Index fell 6 points to 34 in May, below expectations of 40, versus 40 in April. That ties Nov'23 as the lowest reading since Dec'22. 


GOLD

OVERNIGHT CHANGE THROUGH 6:00 AM CST: -$0.74 (-0.02%)
5-Day Change: -$127.92 (-3.87%)
YTD Range: $2,607.16 - $3,495.89
52-Week Range: $2,287.64 - $3,495.89
Weighted Alpha: +34.00

Gold is recovering from a five-week low of $3,127.12 that was set in Asian trading. The yellow metal is being buoyed by a tilt toward risk-off due to a lack of additional progress on trade, and dimmed hopes for a Russia-Ukraine peace deal.



A slightly easier dollar is helping underpin the yellow metal. However, the dollar index is still higher on the week, and a close above 100.69 would confirm a fourth straight higher weekly close. Dollar strength poses a headwind for gold because it makes the precious metal more expensive for foreign buyers.

Gold overran my secondary support zone at $3,165.84/$3,157.86, and the breach of the 50-day moving average is troubling for the bull camp. While it looks like we'll close back above the 50-day today, the downside remains vulnerable.

The $3,200 zone is support once again with today's low at $3,127.12 providing another barrier ahead of the next tier of Fibonacci support at $3,076.12. Below the latter, the $3,000 zone would be vulnerable to tests.

I do continue to view losses as corrective within the long-term uptrend. Incremenum's annual In Gold We Trust report, released today, agrees.

The much-anticipated report entitled The Big Long posits that a secular bull market is forming and that we are "entering the second half of the golden decade." The Incrementum gold price model targets $4,800 by 2030, and that could be as high as $8,900 in an inflationary scenario.

Incrementum notes that cumulative ETF and central bank demand in Q1 was 470 tonnes, the second highest level since 2010. They also cited the rising influence of emerging Asian markets.

A climb back above $3,300 is needed to ease pressure on the downside and favor renewed tests above $3,400. I still see potential for fresh record highs above $3,500 before the end of H1.

Silver reached a five-week low of $31.701 before renewed buying interest surfaced. The white metal is being helped by the rebound in gold and an easier dollar.



While the probe below the 100-day moving average has not been sustained, it presents additional downside risk to $31.309/114, where the 200-day MA corresponds with an important retracement level. The $32 zone and today's low at $31.701 provided intervening supports.

Persistent failures to hold on to gains above $33 in recent weeks leave upside potential somewhat suspect. That concern is bolstered if the dollar continues to rally.

A close this week back above the 20- and 50-day MAs at $32.733/756 would ease pressure on the downside somewhat, but it would still be tough to get overly bullish given the substantial resistance levels above. Further consolidation would be likely at that point.


Peter A. Grant
Vice President, Senior Metals Strategist
Zaner Metals LLC
312-549-9986 Direct/Text
[email protected]
www.zanermetals.com

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