Groupthink in financial markets - gold edition




Ah, the dangers of groupthink in financial markets—the gold edition.

There are some very dumb people among gold bulls—real, imagined, and in hedge funds and the like—who ignore the possibility of negative events hitting sentiment and momentum just when they should have been alert to the dangers.

Take last week—at Thursday's close, gold futures on Comex were set up for a weekly rise of 1% to 2%, depending on how the May jobs data went.

No one really thought the May jobs figures would be that much of a surprise—the conventional wisdom was for a weakish report to firm up the 68% chance of a rate cut by the Fed in September (some punters secretly wished for a very poor result to make a July cut more of a chance).

With the Fed meeting this week, and releasing new forecasts for inflation, growth, jobs, and the much-watched dot plot of future rate move forecasts of Fed members, the market was confident that the jobs report would be ‘good news.'

Before the jobs report, Friday evening, Sydney time would also see the release of China’s May foreign reserves data and the most important part—gold purchases.

It seems to have been a data point that few remembered and even fewer thought to ask why China’s April purchases had fallen so sharply to just 60,000 ounces or 1.7 tonnes, a fraction of the 22 tonnes earlier in January and February combined.

The job data provided the widest shock—the 272,000 for May, the jobless rate much larger than any forecast, and while the jobless rate edged up to 4% (3.96% actually), ending the long run of sub-4% readings.

Up went wages by 0.4% for the month with the annual rate back to 4.1%. Out went all the confident punting on a rate cut later this year—especially after the cuts by the Bank of Canada and the European Central Bank set up a weird macho vibe in some parts of Wall Street about who had the leading global central bank and markets.

April’s 175,000 new jobs figure was cut to 165,000, but that was ignored. May’s 272,000 was the second-highest this year after March’s massive 310,000.

Up with US treasury bond yields (jumping 15 points to nearly 4.4%, and the greenback, and down went share prices.

But before the jobs figures were out, and this was the rude awakening for gold and metal bulls.

The Chinese reserves data for May was analyzed—no gold purchases and down went prices.

The People’s Bank of China didn’t buy any gold last month, ending an 18-month buying surge and helped support and then lift global prices for the precious metal.

The People’s Bank of China had been building its reserves since November 2022, leading a flurry of purchases by the world’s central banks amid rising geopolitical tensions.

China’s purchases in April of 60,000 were down from 160,000 ounces in March, and 390,000 ounces in February. The country’s imports in April, meanwhile, slipped 30% from the previous month—all price-driven it now seems.

But the fall in demand as prices rose was evident in April, and traders, hedge funds, and bugs ignored the message.

But no more—the fall in April came as world prices rose strongly and then in May, they surged to new highs, topping out around $US2,454 an ounce, $US143 an ounce above Friday’s close.

China's gold reserves remained unchanged at 72.8 million troy ounces, after those 18 consecutive months of purchases. Its value, however, increased to $US170.96 billion from $US167.96 billion in April, due to that rise in gold prices that forced China to halt purchases.

Comex gold futures fell nearly 4% at one stage, ending at $US2,311 for a loss of $US79 an ounce (it was down more than $US90 an ounce from the pre-jobs data release around $US2,401 an ounce).

But copper also fell—down more than 3% as did zinc, another punters hopeful among hedge funds and speculators. The trade data earlier on Friday showed a weakening in copper purchases.

Comex copper ended at $US4.44 a pound, down almost 4% on the day and silver slid nearly 7% to $US29.27 leaving lots of traders wearing real or unrealized losses or sharply lower profits.

Friday’s 3.34% gold price slide Friday was enough to push the metal down for the week by around 1.5% and for the last month by around 2.3%.

Might that be enough to encourage the People Bank back into the market? Wouldn’t depend on it—wait and see because the Chinese have been canny buyers.


Name Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.