Gold shines as the race to the bottom in global fixed income continues

Why I love trading Gold

 Gold is a funny animal, and there is such a thing as Gold fever, ask any Gold prospector. But for me, it all happened one morning back in the '90s when I was a greenhorn on the commodity desk and as an introduction to Gold markets I  had the opportunity to romp around the Bank of Nova Scotia's Gold Vault, trust me from that fateful morning my trading life has never been the same. Physical Gold is mesmerising, and despite trading mostly undeliverable futures market these days, it doesn't lessen its glittering appeal in the least.   

Gold Markets

As expressed in our morning note, the critical tenet of our bullish Gold outlook is "Doves to the Rescue" referring to the chorus of central banks that are on the threshold of signalling even looser monetary policy while trade & geopolitical risks remain eye-catching and on the rise.

Two critical pieces of our bullish Gold narrative fell in to place today when the RBA said further policy easing was likely suggesting more dovish shifts are on the way, and then Mario Draghi confirmed our ECB rate cut suspicions after a quorum of ECB officials had been all but advertising this for the past fortnight. 

Gold has bounded higher in convincing fashion after Draghi dovish comments which triggered Bunds to make a new low in yield. But gold remains bid despite the dollar pushing below EURUSD 1.1200.

And while it's too early to suggest that gold is decoupling from the dollar, today's price action does suggest we could be on the verge of that breakdown. But if the Fed comes out anywhere near as dovish as the markets lean, Gold will continue to march higher on the path paved with glittering gold bars.

Indeed, the race to the bottom continues in global fixed income, which will be super supportive for gold prices this year;

Oil Markets

Bulls are struggling to paint a bullish narrative in the in this unequivocally demand driving market. Indeed the demand outlook is packed with doom and gloom with nary a boom in sight. Despite the overwhelmingly bearish description, we think the tail risk for another middle east supply shock or even a flat-out military escalation is higher than the market is factoring.

So while prices continue to wax, and wane caught between rising tensions in the Middle East and signs that trade tensions are hitting economic growth. We prefer to buy on extended daily dips on what we perceive as relatively inexpensive Middle East risk premiums

Currency Markets

ECB President Draghi's dovish commentary has been the main driver of FX flows in the European session as the dollar bid was picked on the Euro after Australia dollar bears spent most of the Asia session feasting on the Aussie as the market positions for a break of  AUDUSD 68

The Euro remains prone on several fronts, namely Brexit, China and auto tariffs.

 I'm biased to remain short EUR due to several headwinds.

1. China data should continue to weaken, which will have an outsized negative impact on the Eurozone.

2. Trump appears to be turning his vitriol back towards Europe as he considers sanctions to block Nord Stream 2 and even move U.S. troops based in Germany to Poland.

3. Auto tariffs should be on everyone radar although timing Trumps next implosion is painful to predict

4. The ECB continues to express a dovish tone publicly

5. Weaker U.S. dollar narrative is completely deflated