The Markets at a Glance this Week

The global financial markets are currently going through a purple patch. Whether you’re a casual trader, or deeply invested in the markets, you will know that a risk-on approach has been adopted to equities markets of late. Consider the performance of bourses on both sides of the Atlantic, and the Pacific. The Dow Jones Industrial Average is up 2.17% over 1 month, the S&P 500 index is up 2.66%, and the NASDAQ Composite Index is up 5.44%. Now that the anxiety of the French elections is over, we can see dramatic momentum driving markets.

The CAC40 index is up 6.59% over 1 month, the Ibex 35 is up 5.53%, the German DAX is up 5.46%, and the laggard is the FTSE 100 with gains of 1.47% over 1 month. All of this tells us that a risk-on approach to equities is in effect. In Asia, the 1 month gains are far more impressive. The Hang Seng index is up 3.69%, and the Nikkei 225 index is up 8.44%. This bodes well for stock traders, according to equities analyst Montgomery J. Chiasson from Lionexo. The technical and fundamental analysis that traders are using to gauge the performance of bourses and individual stocks points to sharply improving sentiment.

How is Gold Performing Now That Equities Markets Are Roaring?

Currently, the spot price of gold on the Comex is $1,227.70 per ounce. This is for futures contracts for June 2017. The 2-day trend for gold is bullish, but reversals are not out of the question. Recall that gold is a safe-haven commodity that reacts sharply to geopolitical uncertainty. Were there to be a conflagration, or an escalation in tensions with North Korea the gold price would soar. Now that we have a risk-on approach adopted to equities, gold is showing signs of weakness. The 1-month trend for gold is bearish, but the recent reversal has brought the gold bugs out to play. Consider that the 52-week trading range of gold bullion is $1,129.80 on the low end, and $1,391.50 on the high-end. But there is something driving down the price of gold and demand for the precious metal more than anything else: the looming Fed rate hike. Recall that the Fed is scheduled to meet on June 14, 2017.

Currently there is a 78% probability that the Fed will act and raise interest rates by 25-basis points. If the Federal Open Market Committee (FOMC) increases interest rates, the FFR (Federal Funds Rate) will be in the region of 1.00% – 1.25%. This does not bode well for gold. Gold is an asset that does not earn interest. Whenever the Fed raises rates, the opportunity cost of holding gold rises. In other words, money can be better spent by investing elsewhere in fixed-income bearing securities, or even equities markets which yield stronger returns. The immediate impact of a rate hike on the USD is an appreciation. Since gold is a dollar-denominated financial asset, it is impacted when rates rise.

What Other Factors Are Driving the Gold Bears Out of the Caves?

The US economy is robust. In April 2017, the unemployment rate dipped to 4.4%. This is the lowest level in many years. More importantly, the strong uptick in employment numbers (+211,000 in April) dashed any hopes for a rise in the gold price. Now that jobless benefits are hovering around 3 decade lows, it is clear that the US labor market is tightening. The volatility that characterized the European political landscape has all but evaporated with the election of French president Emmanuel Macron.

Of course, the uncertainty of Brexit proceedings and the upcoming UK election are good for gold bugs. In May alone, the precious metal retreated by approximately 3.5%, as large hedge funds have been short selling gold in the futures markets. Traders will want to watch the US dollar index for signs of an imminent appreciation, as well as other macroeconomic data releases such as US retail sales figures which could swing the needle on the gold price.