Gold and silver pulled back on Friday but ended the week up sharply higher. The flight path for gold, which has been almost parabolic, infers some correction was possible.

After President Trump’s executive order limiting business with Chinese-owned WeChat and TikTok apps, initially lent some support to bullion. But then the gold sell-off started in Asia despite a weaker equity market which was unable to underpin gold as perhaps the massive write-down on the widely held Tencent may have triggered some gold selling in Asia to cover margins.

Still, on balance, gold prices were relatively steady in both Asia and Europe.

The big move lower came in US trading hours. A slightly better-than-expected US jobs report lent strength to the US dollar, which weighed on gold.

Gold initially fell on better-than-expected US jobs data as the algorithms ran roughshod over the Non-Farm Payroll (NFP) data release.

Prices then fell further exacerbated by retail selling as most unsuspecting traders were unsure why gold was falling other than a slightly firmer USD dollar, which reprices gold lower because gold is priced in dollars.

Other than the algos, I am not sure who was actually buying dollars on the NFP prints. Let us face it the days when robust US economic data will change the Fed policy perspective are gone as data “beats” will surely not change the Fed’s funds outlook anytime soon.

Yes, it will take away some of the urgency from additional Fed measures like yield curve targeting, but that is much less of a big deal with real yields where they are.

More pretzel logic

The Fed has made it clear policy will be accommodative for some time, giving fixed income a strong anchor, and negative real yields feel like a more significant driver for gold. Still, even that anchor slipped on Friday as the stronger dollar hurt the price of commodities.

But the market pretzel logic was in vogue still on Friday. Investors had been piling into gold to hedge against a rise in US-China tensions only to see commodity traders unfortunate predisposition to heightened US-China trade tensions which caused them to sell commodities and oil which saw real interest rates — which strip out the effects of inflation — rise by the most in a month Friday. Which ultimately ended up weighing on gold.

Gold and the US dollar

For the most part, the DXY is getting driven by the Euro, where USDAsia has been the laggard, and as I continuously remind folks when it comes to opening the door to dollar weakness, it takes two to tango.

But history also suggests when it comes the Euro, levels are critical and as I had recently been concerned that the EURUSD bounce was not a Eurozone equities inflows thing, but that maybe it is better to think of this EUR strength more as a reduction in the existential risk premium or increase in European unity rather than an inflow story.

Amber lights over the short term

Not everything asserts for higher gold. As mentioned earlier, chatter that producers may increasingly take advantage of prices, far more than the highest marginal mine costs, to sell forward.

Longer-term holders of bullion from hundreds of US dollars below the market may continue to take profits. The market got a further bounce as strike prices at USD2,000/oz, USD2025/oz, and USD2,050/oz were triggering short covering.

But this has already occurred, and the market fell well short of challenging the USD2,100/oz, mark, so there may not be much more fresh buying from this quarter especially with US Treasury yields trading firmer on the back of better US economic data, as traders are again thinking the end of the runway for lower actual yields is nearing.

With that in mind, it might be up to real returns to the bulk of the heavy lifting so that the oil market will be back in focus over the near term. Higher oil prices raise inflation. break evens more favourably for gold

Gold has yet to challenge previous highs in real terms, either 2011 high adjusted for CPI (USD 2,159/oz), or the all-time of USD 2,805/oz in real terms. While it is not out of the question gold can reach 2300-2500 this year, the most prominent risk to gold is nominal risk-free yields moving higher.

That is not to say gold can not move higher if nominal yields flatline of move slightly higher from current levels; it just means the load falls on other factors to enhance gold from a bullish perspective.

Subdued physical demand in the east is offset by ETF buying.

The gold rally in 2020 is unequivocally driven by macro factors rather than supply and demand fundamentals that may be driving other commodities higher due to supply chain disruptions.

Negative and falling real rates, a weaker dollar, elevated geopolitical uncertainty and the exorbitant cost to repair the damage done from Covid-19 has seen the Federal Reserve and US Governments balance sheet grow to incredulous proportions creating an extremely a favourable for the gold environment for encouraging a wide range of investors to build strategic gold allocations.

As such, it is not surprising that prices are up over 34% YTD despite sharp declines in gold consumer demand in the form of jewellery, dentistry and bars, and coins. Gold ETFs globally has increased by over 27 million ounces. Not only is Investor interest growing, but the base is expanding exponentially.

However, with a growing demand for physical settlement of futures contracts investors appear to be using gold futures to get long physical, the current level of gold hoarding behaviours in the major NY hub is suggesting there is a possibility that gold could see the opposite of what happened in crude oil earlier in the year amid problematic international travel and massive demand for physical delivery.

Gold markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp