Gold Futures Are Telling A Story Beyond Geopolitics

At a Glance

  • North Korea, rate projections among key fundamentals driving trading
  • Retail traders finding opportunities with volatility

When North Korea launched a missile over Japan in late August, gold prices soared to what was then their highest level since the November 2016 U.S. election.  Matched with ideas of a slowing U.S. economy and the possibility of the Federal Reserve keeping rates flat for at least the remainder of 2017, gold has again emerged as a safe haven asset, rising to nearly the $1,350 level on September 8.

The flight to gold is most apparent in gold futures trading, where we’ve seen a surge in COMEX gold futures volume in 2017. This includes two of the top 10 all-time highest trading volume days occurring since the end of August: August 29 following the North Korea missile launch over Japan, and September 5 following another missile test from the North.

The Fundamentals

We continue to see gold responding to global events. The highest ever trading volume day for COMEX gold futures remains Nov. 9, 2016, the day after the U.S. Presidential election. But major geopolitical events are far from the only factor for gold’s increase in 2017.

Inflation in the United States remains below two percent, while the August jobs report came in with lower-than-expected gains. Two Federal Reserve officials have recently warned against further rate increases, with one saying rate increases over the past 18 months could be doing “real harm” to the U.S. economy.

All of this signals no Fed rate increases to come this year and has contributed to a weaker U.S. dollar, which traditionally sends more investors to trade gold as a safe haven asset.

What’s Happening?

Gold futures have been trading at their highest levels in a year. In August 2016, prices peaked in the months following the Brexit vote (still the third highest trading volume day ever for gold futures).  At the time, prices jumped more than $100 within two weeks.

We’re seeing  similar price gains now, though without the singular geopolitical event driving trading. In fact, following the U.S. election, price gains did not sustain momentum the way they did after Brexit.  We can see a pattern with the Fed/jobs report/inflation confluence as well. When payrolls exceeded expectations in July, gold dipped, but when inflation data came in low, trading once again increased

The Retail Trade

The other critical factor driving the recent gold interest is the demand from retail traders. That is, traders who traditionally trade independently and with smaller accounts than institutional market participants.  These traders often see gold futures as a way to hedge against financial, political or economic uncertainty.  Gold is also familiar, and volatility provides retail traders with speculative opportunities.

This has been increasingly true for retail traders in Asia. In 2016, COMEX gold futures trading in Asia grew by 60 percent compared to the prior year, more than any other region. In 2017, growth so far is at 11 percent, trailing only North America. The 23-hour per day access to gold futures markets is a big reason for the regional growth. Traders can find liquidity during Asia trading hours in a way that they cannot in cash markets.

Economic growth in China has also helped. China’s GDP grew by 6.9 percent in the second quarter of 2017, beating expectations of 6.8 percent. Trading overall is up in the country, and traders have more to invest.

What’s Next?

Gold markets are often likely to respond to geopolitics. That reflects a trend going back decades. But as we assess price, we must also look at trading volume in gold futures. When market participants from around the globe can express future views in liquid markets around the clock, we get a better sense of the what, when and who around movement in the gold market overall.

Youngjin Chang is executive director of metals products and global head of metals at CME Group.

Additional Recent Articles in Commodities