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Gold traders 360-degree playbook

Chris Weston
Chris Weston
Head of Research
Mar 4, 2020
In this week’s gold weekly, the focus falls on the US rates and global bond market, where moves have been absolutely staggering.

I will be writing a piece on the growing prospects for Aussie QE soon, but when we see swaps pricing negative rates in these here shores, we know things are extreme. We’ve seen the first emergency FOMC meeting since 2008, with the subsequent 50bp cut from the Fed, yet traders used the initial pop in the S&P 500 to raise cash and reduce equity exposure with the index closing -2.8%. Gold will find buyers when equities are falling and it’s this backdrop I want to explore.

Rates chart
Source: Bloomberg

We haven’t seen much concern in investment-grade credit markets just yet and that is an asset class gold traders should be watching. Debt matters when economics are deteriorating. Italy is also a growing concern given they are at the centre of the worry, therefore, we have an eye on Italy 10-year bonds (BTPs) spreads over German 10-year. That said, yield differentials have only widened modestly and not given FX traders any reason to sell EUR’s, which could be a trigger to buy gold in EUR terms. That is, if Italian bonds do sell offer more aggressively.

I have a focus on EU banks, which are coming into worrying levels and could weigh on the EUR more intently and could again be a reason to look favourably at gold.

EU STOXX banking index
EU STOXX banking index chart

I continue to like gold and feel we need to let the market compel and push the trade. This means a push through 1649 and even 1660/5, as this would tell me a lot about the bull’s dominance and the view that a body in motion stays in motion. I can see the options market is very upbeat about the prospect of golds upside, we just need to see this in the price action. Happy to turn more bearish on gold through 1548/5.

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