Oil prices plummet amidst a flurry of geopolitical headlines, but what does this mean for gold?
I just shared the following with my subscribers, and I thought that today I’d also like to share it with you - free of charge - as a small thank-you-for-reading-my-analyses gift.
A note rather than a full Gold Trading Alert today, since the US stock and bond markets are closed for Memorial Day and no regular Alert was scheduled. I thought you’d appreciate an update, so here we are.
The big move is in oil. WTI is down 5.9% to around $90.90 as I write this. Brent is down roughly 5% to the $98 area. That is a real move that deserves a comment, but it does not change the outlook.
Here is what happened over the weekend. On Saturday, Trump posted that the Iran deal had been "largely negotiated" and would be announced "shortly." Iran's foreign ministry spokesman said the two sides were in the "final stage" of a memorandum of understanding. The leaked terms describe a 60-day MOU in which the Strait would reopen with no tolls, Iran would clear the mines, and the US blockade would lift in stages tied to Iran's compliance. By Sunday, Trump pulled back the urgency. He said his negotiators should not "rush" because "time is on our side," and confirmed the blockade stays in place until the deal is "reached, certified, and signed." A senior US official told reporters the agreement would not be signed Sunday because the Iranian side had not moved fast enough.
This is the relief-rally pattern this market has run many times. The April 7-8 two-week ceasefire saw oil collapse 13-16% intraday on identical news, and the ceasefire functionally collapsed within 18 hours. The March 23 "open very soon" headline failed within a day. The May 18 "final stages" rally lasted hours before reversing. Each iteration gets less follow-through because the underlying structural disagreements have not actually moved. The current MOU shows the same fingerprints. Iran's foreign ministry is already publicly saying the Strait "has nothing to do with the US" and that the relevant talks are with Oman, not Washington. Tasnim is reporting that clauses remain in dispute. The pattern says don't trust the headline until the signature is there.
The price action confirms what the headlines should make us suspect. Look at the precious metals tape today. Gold is up 1.92%. Silver is up 3.07%. Platinum is up 1.97%. Palladium is up 4.50%. Gold is the worst performer in the complex.Every single time in this cycle when silver and the thinner PGM metals have led gold higher, that has been the setup for the next leg down. March, mid-April, late April, and most recently the May 11-15 sequence that ended with silver crashing 8% in two days.
Technically, gold is verifying its recent breakdown – that’s it.
The other reason the rally is suspect is that the channel only relaxed on one side this weekend. A quick reminder of what the channel is, because the mechanism matters here. Elevated oil keeps headline inflation sticky. Sticky inflation removes the Fed's room to cut and, increasingly, creates pressure to hike. The expectation of higher-for-longer rates supports the dollar. A firm dollar plus elevated real yields removes the two things gold needs to rally. The chain has multiple links, and gold needs most of them to weaken at once for any rally to stick. This weekend, only the first link relaxed. The oil side is being walked down on the MOU headlines.
But the Fed side just hardened.
On Friday, Governor Christopher Waller, who was the most prominent dove on the FOMC earlier this year, gave a speech titled "Policy Risks Have Changed." He estimated April core PCE at 3.3% and headline PCE at 3.8%, called for stripping the "easing bias" language out of the policy statement, and effectively endorsed the four dissenters from the April meeting. That's the last dovish voice on the committee flipping hawkish. Combine that with the FOMC minutes from Wednesday that openly discussed hikes, and the rate-cut narrative is in worse shape today than it was a month ago, even if the strait opens tomorrow.
Warsh took the oath on Friday. Trump used the swearing-in to tell him "I want Kevin to be totally independent. Don't look at me, don't look at anybody." That removes one of the few remaining sources of dollar weakness the market had priced in, namely a politicized Fed that would cut against the data. With Waller hawkish, the dissenters hawkish, Warsh constrained by political optics, and inflation at 3.8% headline, the Fed has even less room to cut than it did last week.
So the structural picture is this. If the MOU gets signed and the Strait reopens, oil drops further and gold gets some relief on the inflation side. But the Fed side is now too hawkish for that relief to convert into a real gold rally, and the relative weakness in gold today says the market knows it. In this environment, gold could decline on the fact that the conflict is ending.
If the MOU does not get signed, which the April-May track record suggests is the base case rather than the exception, oil snaps back, the channel intensifies, and gold plunges.
Either way, the outlook remains intact. Gold's breakdown below the rising medium-term support line was confirmed. It’s being verified at the moment of writing these words – nothing else.
I'll keep you - my subscribers - informed.
Thank you.
Sincerely,
Przemyslaw K. Radomski, CFA
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