The war of words between Trump and Kim escalated Thursday and that sent a shudder through markets and a flight to safety that boosted gold near some key levels. The yen was the top performer while the kiwi lagged. US CPI is due on Friday.
Hedge fund heavyweights Ray Dalio and Jeff Gundlach touted gold this week and the chart is worth a close look. It climbed $10 to $1286 on Thursday; that's the best level since early June. It's breaking a major 6-year trendline resistance, nearing a double-top that was carved out just below $1300 in April and June. Gundlach highlighted how the chart was forming a cup-and-handle pattern. Dalio said rising political risks made a 5-10% allocation to gold necessary.
The market is spooked at the moment, but not as much as the 36 point decline in the S&P 500 would indicate. Ten-year yields were down just 4.6 bps and the FX moves are miniscule compared to US stocks, which had their second-worst day of the year.
A big part of the story is volatility. Trades betting on low volatility are far too crowded, something we've pointed out time and time again. As trouble stirred this week, the VIX jump was inevitable, but is it a squeeze? That brings us back to gold. If the fears are real and lasting, then that zone around $1300 will be a critical bellwether. A break would put the 2016 high of $1376 in clear focus.
In the background, the US dollar continues to struggle. The PPI report was soft, and it could well be a preview of Friday's CPI. The consensus is for a 1.8% y/y rise and 1.7% on core. A miss to the downside will spark serious doubts about a December hike.