Gold: Momentum and the market mood
Gold’s remarkable rally is continuing, with prices breaking above USD 2,700 per ounce last week. Looking for the factors that are fuelling this rally, it seems to be primarily about momentum and the market mood. The positioning of short-term speculative traders and trend followers in the futures market recently reached one of the highest levels on record.
Typically, such extreme euphoria is a warning sign, as it shows some detachment of prices from fundamental factors:
- The US dollar and US bond yields have moved higher again, as expectations of interest rate reductions have moderated. As a result, the already moderate inflows into physically backed gold products have slowed even further.
- Asian gold buying remains soft, as is indicated by Chinese imports, physical deliveries, and domestic price premiums. Indian gold imports have normalised as well, following strong volumes in reaction to a surprising import duty cut.
While this raises the risk of a short-term setback (potentially up to 10% if history is any guide), we still see a sound fundamental backdrop for gold. A further cooling of the US economy and the outlook of lower US interest rates could lure more Western world investors into the market. The same applies to the US presidential election, which is allegedly fostering unobserved gold buying by large investors who believe that regardless of who will make it to the White House, the US dollar will come under pressure due to widening fiscal deficits.
Chinese investors and the People’s Bank of China should also return to the gold market as well. For the former, it is about the persistent weakness of the economy despite recent support measures. For the latter, it is about the low share of gold in its currency reserves and ongoing geopolitical tensions, particularly in relation to the US. Against this backdrop, short-term setbacks will likely be treated as buying opportunities. We remain Constructive.
Earnings season: A tale of two continents
In addition to boosting demand in gold, US dominance in terms of economic strength can hardly be ignored. This earnings season is a case in point: at the outset of the third-quarter reporting season, we are witnessing the most sizeable gap between the US and Europe. Yes, it may partly be due to the usual US presidential cycle, as US policymakers are quite talented at pumping up the economy, so that Americans are in a good mood about the economy when they vote. But the US outperformance started long before the beginning of the latest cycle and is indeed structural.
In the US, a remarkable 79% of the companies who have reported earnings have beaten expectations, outpacing the 10-year average at 74%. Financials and information technology (IT) companies are leading the pack with the strongest surprises, while commodity companies have once again the lowest beat ratio. Markets have rewarded these strong results with a median share price outperformance of +1.7%, and the message is clear: corporate America is delivering.
In Europe, the story is quite different. With just 40% of companies having beaten earnings expectations so far, the mood is far more somber. The ongoing weakness in China has been cited as the main culprit for the weak results. European companies’ earnings disappointments have triggered a negative market reaction, with share prices underperforming by - 2.9% – a steep contrast to the US and one of the lowest readings in years.
What does this mean for investors?
At the moment, gold’s remarkable rally seems much more driven by momentum and the market mood rather than fundamental factors. However, we still see a sound longer-term fundamental backdrop for gold. Therefore, any short-term setbacks will likely be treated as buying opportunities and we remain Constructive.
The message is clear: corporate America is delivering, and Europe is struggling. For now, the advice is to stay overweight on US stocks compared to European counterparts, especially as the two markets continue to tell very different stories. This stark divergence between US and European earnings has only reinforced our view that US equities remain the more attractive play.