‘Real Deal’ On Gold
Just a couple of weeks ago, the initial claims data was a far larger number than we expected, indicating more unemployment.
Why would gold go down on that event?
There’s always going to be a knee jerk reaction that has to do with whether or not that particular data point is perceived to be good or bad. For example, the idea that gold would go down on that event, or the idea that the market would go up on the event, or any kind of assumption.
Stick with me because we’re going to take the next step of whether this is “strong data, good and weak data, or disappointing.” Consider the environment where the Federal Reserve has explained to the investing public and the trading public that if the economy continues to heat up, then in 2023 the Fed is open to a total of 50 basis points or half a percentage point of rate hikes.
In this case of disappointing data, it would generally be perceived as a reason for the Federal Reserve not to act. So again, while that drop might include a few moving parts, realize that in this kind of environment the market’s almost always going to perceive disappointing data as actually good for the stock market.
If that’s generally perceived to be good for the stock market, then the perception would not be why is gold moving according to the data, but…
What else could the data be reacting to in this instance?
Sometimes, in an effort to find correlations, traders often are simply unable to see what the connective thread might be between the event, something in the middle, and then why gold or why the equity markets could move.
For gold, it’s a middleman that is very often going to be either the U.S. dollar or bonds.
Sometimes we’d like to make a very direct line between two markets. When in reality something is in the middle. So when it comes to gold and the reaction to any kind of data event (not just the initial claim, but any kind of that event) we have to look for that middleman.
We want to see if the dollar moved higher or lower in that same period of time? What happened with bonds? Did bonds move higher or lower in that period of time?
When you take a look at bonds and dollars, the gold movement makes much more sense in reaction to what happened. That brings up the immediacy or the proximity of the reaction.
Another thing that often throws traders is when the market has a bit of a delayed reaction. This has to do with the time that the data event occurred. These events mostly occur at 8:30 a.m. Eastern and 10 a.m. Eastern.
The difference between the two is markedly important.
8:30 a.m. — This is one full hour before the Wall Street bell — one full hour before the broader attention. The volume of a 10 a.m. event is 30 minutes after the bell. Not every time, but often you will see that 8:30 a.m. data points really play out at or after 9:30 a.m.
So that’s another factor to remember. The initial reaction might be a strange one or might not even be one at all because the broader attention and volume is still one full hour — an hour away. The question that comes up next, often as it relates to gold, is that it’s a safe haven.
Countdown Fun Fact: A safe haven, in layman terms, is simply where market participants will go when they feel that equities won’t go up.
Typically, gold is seen as a safe haven from a risk off environment. The risk off is typically weak.
The perception of the safe haven isn’t in reaction to economic data, certain macro economic environments, or financial and political uncertainty. These events usually have to be pretty significant financial or political uncertainty events. Gold can usually benefit from that, but that is not the normal operating reaction for gold.
Gold is usually considered a “go to” option.
If the stock market is expected to move lower, some people think, “Well, we’re going to go find a safe haven in gold.” Often there are other places that get just as much, if not more flow — gold just seems to be the knee jerk reaction.
When you actually study flows, you’ll notice that utilities, staples, bonds, and/or the U.S. dollar, there are other markets that actually benefit from uncertainty in a way that’s more predictable than gold. I don’t want to completely say gold is not ever a safe haven, but again, it’s usually a more extreme financial and political thing considering geopolitical situations.
Keep an eye out for next week’s update…part 2 of our gold conversation.
