The price of gold fell nearly 5% in the overnight session to $1,677.9 per ounce, its lowest level since March 31. Gold has since recovered some of its losses, trading about 1% lower on Monday.
Gold was already in bad shape prior to the crash, having dropped 4% on Friday to breach a key technical level. The initial selling was triggered by a stronger-than-expected jobs report, which boosted bets that the Federal Reserve will tighten its accommodative policy soon. The subsequent lack of liquidity exacerbated the sell-off and triggered the flash crash.
“In response to the strong non-farm data, gold prices broke below their bull-market defining trendline for the first time since 2019 — fueling significant stop-outs and melting gold’s price,” TD Securities commodities strategist Daniel Ghali said.
Gold fell as Treasury yields rose and the dollar rose in response to the July jobs report. A stronger dollar reduces the appeal of gold by making it more expensive for holders of other currencies. Meanwhile, rising yields are usually bad news for non-yielding gold, and the prospect of higher interest rates caused investors to dump bullion even more.
Silver fell in lockstep with gold on Monday, briefly falling to a low of $22.295, its lowest level since November 2020.
“The catalyst was strong non-farm payroll data, which helped spark significant liquidations as the Fed’s dual focus on inflation and jobs places additional emphasis on employment data, with global markets attempting to gauge the taper clock and set a timer for the Fed’s first hike,” Ghali said.
What comes next?
According to Craig Erlam, senior market analyst at Oanda, gold eventually found support last night around $1,680, which is the 61.8 percent retracement of the 2020 lows and highs (Fibonacci Retracement levels).
Technically, $1,750 represents a significant potential resistance level for gold, according to Erlam, as the commodity has struggled to recover to that level.
While the price has recovered somewhat, Ghali of TD expects trend-following funds to increase their net short position in the coming sessions, putting more pressure on the commodity.
According to Peter Boockvar, chief investment officer at Bleakley Advisory Group, macro investors’ gold investment decisions should reflect their outlook on the central bank’s next move. Investors should buy the dip if they believe the Fed will fall behind the curve, according to Boockvar.
“The trade with gold and silver is fairly simple here,” said Boockvar. “Sell if you believe the Fed will get ahead of the curve, or at least keep up with it, in terms of inflation. If you believe the Fed will slow its tightening, this selloff is a gift. I’m inclined to believe the latter.”
In a note to clients on Monday, analyst Shaun Kelley stated that travel and gaming demand in Las Vegas is rebounding. Bank of America upgraded Caesars to buy from neutral, saying the company’s recovery at physical casinos puts it on solid ground to continue expanding in the booming online and sports gambling markets.
“Today, CZR has a 3% digital market share, but we believe this is set to grow. … CZR now has a strong, cash-generating land-based casino business that should deleverage quickly and generate meaningful cash flow to fund this transition, according to the note.
Wynn Resorts’ reliance on Macau, on the other hand, appears to be hurting its rebound prospects, according to Bank of America, which downgraded the stock to neutral from buy.
“Despite China’s rapid COVID recovery, the Macau gaming market has been hampered by visa restrictions, virus outbreaks, and new policies that have hampered cross-border travel.” “Prior to COVID, Macau accounted for 70% of Wynn’s EBITDA mix and is one of the most China-exposed names in the US stock market,” according to the note.
This year has been a roller coaster ride for Caesars. Shares are up nearly 22% year to date, but have dropped more than 14% in the last three months. Wynn has also dropped precipitously in the last three quarters, and is now down 12 percent for the year.
BofA kept its price target for Caesar’s at $125 per share, which is 38% higher than the stock’s closing price on Friday.
Bank of America reduced its target price for Wynn to $105 per share from $130, representing a 6% increase in the stock.
The infrastructure bill
The bill specifies spending for a variety of purposes, including transportation infrastructure, nuclear energy, carbon capture, the power grid, and broadband.
With this in mind, Bank of America outlined a roadmap for which utilities companies appear to be the most appealing.
Analysts led by Julie Dumoulin-Smith noted that the package includes $6 billion in spending for nuclear plants on the verge of closure, which could benefit companies such as Exelon. According to the firm, the company could be a “primary beneficiary” due to its “significant unregulated nuclear fleet.”
“While nuclear is a potential benefit to a wide range of plants,” the firm wrote in a recent note to clients, “we see EXC’s active need for support in Illinois as particularly benefiting from any federal action effectively deferring state level funding to a federal focus.”
Exelon announced in its latest quarterly results on August 4 that it will close plants in Illinois unless supportive legislation is passed.
“While we remain hopeful that a state solution will be passed in time to save the plants,” Exelon said in a statement. “However, clean energy legislation in Illinois remains mired in negotiations over unrelated policy matters, leaving us with no choice but to continue down the path of closing the plants.
“Looking ahead,” the company said, “we continue to execute our plan to separate our utility and generation businesses into two financially strong, independent companies, which we expect to complete in the first quarter of 2022.”
Bank of America has a buy rating and a $54 target price on the stock, which is 13% higher than where the stock closed on Friday.
The infrastructure package also includes more than $60 billion in spending for grid upgrades, including transmission and distribution.
According to the bill’s fact sheets, this will be the “single largest investment in clean energy transmission in American history,” with “thousands of miles of new, resilient transmission lines to facilitate the expansion of renewable energy.”
American Electric Power, Ameren Corp., and NextEra Energy are among the companies that stand to benefit, according to Bank of America.
All three stocks have a buy rating from the firm. Dumoulin-Smith has a $97 price target on American Electric Power, which is 8% higher than where the stock closed on Friday. When it comes to Ameren Corp., he sees shares rising 5% to $91, while NextEra’s $84 target is 4% higher than where the stock closed on Friday.
According to Bank of America, the infrastructure bill also emphasizes the need to bring manufacturing back to the United States, which could benefit companies like First Solar and Maxeon. Both stocks have a buy rating from the firm.