Uncertainty in global markets is driving increased net speculative long positioning in gold

• Equity and fixed income markets whipsawed once again last week, primarily on escalating US/China trade rhetoric (see below). Stock markets in Europe were higher by 2%, China was lower by 2%, and the US was lower by 1%. EM stocks felt the most pain falling 4% in dollar terms as their currencies weakened. Generally, stock prices and bond rates tend to move in tandem but this has shifted this year. Rates and stock market levels continue to decouple, with rates falling and stock markets rallying. The 3m/10yr curve in the US is flat to negative again, and the absolute rates in the US 2yr and 10yr, are back at levels seen in late 2017/early 2018 when the Fed’s effective rate was 1% lower. The strength in the stock market is being impacted by monetary policy as well as the market’s perception there will be easing in the future. The implied probability of a Fed cut this year increased sharply again last week to 75%, despite the US stock market falling less than 1%. Commodities were higher by 1% last week, led by oil which was higher by 2%, as OPEC suppliers suggested their intention to keep supplies constrained for the remainder of this year.
• This week (5/20 – 5/24) is a busy one on the macro front with Fed officials speaking throughout the week, FOMC and ECB minutes, as well as EU Parliament elections. The decision over the weekend by the US to ban Huawei is likely to put a significant damper on the US/China talks, which has led other countries to follow suit, impacting the global supply chain. Stock in India and Australia rallied sharply today as it appears Modi will retain power in India, and there was a surprise election victory for conservative Prime Minister Morrison.

Source: Bloomberg

• Gold fell slightly last week despite starting the week strong, on Monday, closing above $1,300 (LBMA -0.5%, XAU -0.7%) as stock markets rallied back sharply during the middle part of the week; this risk-on environment along with the strength in the US dollar last week (up 1%), is creating a headwind in the price of gold. COMEX net longs increased sharply for a third week in a row from 243t to 399t driven by an increase in net speculative positioning. May trading volumes are in line with April averages at $105bn a day. Gold remains flat on the month and year, which is reflected by extremely low implied and realized volatility.

Source: Bloomberg, World Gold Council

• Globally, gold-backed ETFs experienced inflows of US$183mn last week, coming from Europe and North America; the first week of inflows for North America this month. Asian funds had significant outflows last week (-141mn); that represents a loss of 5% of Asian assets in one week. Asian funds have now lost 17% of assets this year. On, the month, Europe is the only region with positive flows, with an increase of 1% of assets. Year-to-date there have been global outflows of $973mn or 1% of assets, again with European funds having the only net inflows globally.
• Technicals – Gold moved above $1,300, its 200-day moving average, and neckline on Monday, but failed to hold, falling back to where it began the week. Those levels continue to be important ones for the price to have a meaningful breakout to the upside. The 50-day moving average of $1,270 should act as support.