Why the great gold rally is in danger of petering out

By Steve Goldstein

Gold is vulnerable to the downside, strategist says

The bet on China's economic stimulus hit a big stumbling block on Tuesday after authorities held a press conference without announcing any big new measures. Whether China bulls like David Tepper - who did say he wanted a pullback - will use it as a buying opportunity or a signal to take profits remains to be seen.

One other high-flying asset, at least this year, has been gold. Driven by expectations of big Federal Reserve interest rate cuts, as well as foreign government fears of further U.S. confiscation of assets, gold has been driven gold to record highs, and made it through the first three quarters of the year as one of the best-performing assets, ahead of even U.S. stocks.

But rallies don't go on forever. And over the last few weeks, gold (GC00) has been trading sideways.

Christopher Watling, the chief market strategist at Longview Economics, says rising U.S. bond yields BX:TMUBMUSD10Y and a suddenly buoyant U.S. dollar DXY have put a brake on gold's rally.

Better-than-expected U.S. economics data has led markets to dial back expectations of how aggressively the Fed will cut interest rates, which he says has put downward pressure on gold prices.

"Added to that changing interest rate (and dollar) outlook, gold is also vulnerable to the downside from a positioning, sentiment, and models' perspective," says Watling.

Speculative positioning is crowded, measured sentiment is bullish, and technical indicators are at or near their sell thresholds, he says.

"This week's inflation report, as well as incoming data on the U.S. labor market bears watching closely (as potential triggers for further repricing on Fed rate expectations)," he says. The September consumer price index is due Thursday, along with the latest weekly jobless claims.

The market

U.S. stock index futures (ES00) (NQ00) were higher in early Tuesday trade, after Monday's losses in the S&P 500 SPX took away the rally on the nonfarm payrolls report. Crude-oil futures (CL00) slumped, while the yield on the 10-year Treasury BX:TMUBMUSD10Y was little moved.

   Key asset performance                                                Last       5d      1m     YTD     1y 
   S&P 500                                                              5695.94    -1.15%  4.11%  19.42%  31.37% 
   Nasdaq Composite                                                     17,923.90  -1.46%  6.16%  19.40%  32.92% 
   10-year Treasury                                                     4.025      28.80   37.50  14.41   -63.94 
   Gold                                                                 2661.1     0.17%   4.95%  28.44%  41.92% 
   Oil                                                                  75.5       10.56%  9.74%  5.85%   -12.60% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

Alibaba (BABA) and Las Vegas Sands (LVS) were among the China plays stumbling in premarket trade after a National Development and Reform Commission press conference ended with little fanfare.

China separately put provisional tariffs on European brandy as a response to EU tariffs on electric vehicles.

Hurricane Milton is expected to grow in size and hit the west coast of Florida on Wednesday, the National Weather Service said Tuesday.

PepsiCo (PEP) starts off earnings season on a downbeat note, lowering its sales growth forecast for the year to "low single digits" from 4%.

A Fed governor, Adriana Kugler, said the speed of interest-rate normalization will depend on inflation and employment data as the central bank continues its data-dependent approach.

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The chart

Large-cap property-and-casualty stocks XX:SP500.40301040 on Monday had their worst day since COVID, on fears about the impact of Hurricane Milton. Historically, big drops tend to see outperformance afterwards, with one-year returns more than double the historical norms, finds Bespoke Investment Group.

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-Steve Goldstein

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10-08-24 0649ET

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