The Week Ahead In Gold

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After seeing some significant downside in recent action, the gold market is trying to find some stable footing once again. The gold bulls showed some signs of life this past week as prices staged an upside breakout from recent sideways action, however, the follow through on that breakout has not been much to write home about thus far.

 

Unless a solid push higher in prices is seen this week, the gold market may once again find itself on the defensive.

 

The gold market finds itself in a peculiar place currently, having several issues potentially working for and against it. Although the notion of higher interest rates has weighed on gold in recent weeks, the idea of extremely slow and incremental hikes in the Fed Funds rate could still be considered bullish for the yellow metal. Not only that, but some of the recent data released is less than stellar, prompting some analysts to speculate that the Fed will in fact not raise rates in December and will remain on hold until sometime next year.

 

Higher global equity markets have also likely weighed on gold. The broad market S&P 500 remains not far from recent all-time highs, yet has been unable to make a new high for some time now. In fact, the longer the market remains close to previous highs without any attempts at a fresh high, the more potentially volatile price action may get if the market starts to break down.

 

Perhaps the biggest factor weighing on gold in recent weeks has been the strength seen in the U.S. dollar. The greenback has been on the rise and is currently trading at levels not seen since last March. Looking at the larger timeframe, the dollar index is approaching the 100 level, and along with it the top of a five year trading range.

 

The combination of possibly higher rates and a sinking Great British Pound are likely the primary drivers of current dollar upside, and the greenback could have further room to run. An upside breakout of the recent five year trading range could potentially see the dollar move significantly higher, and could potentially fuel selling in gold, silver and other dollar-denominated commodities.

 

Of course, all of these potentially bearish issues for gold could turn on a dime. With a very busy string of economic data coming up this week, things could get interesting.

 

Investors will get the latest readings on several key pieces of economic information this week including Consumer Confidence, New Home Sales, GDP, Weekly Jobless Claims, PMI Manufacturing Index, Durable Goods Orders and more.

 

All of these key data points have the potential to be market-moving, and any significant misses in this data could potentially fuel fresh speculation on the likelihood of a December interest rate hike. Such speculation could have a large impact on equity, interest rate and currency markets.

 

Gold has been lacking any fresh bullish catalyst for some time now. That being said, however, it seems that several factors could be coming into play in the near future that could potentially drive gold sharply higher. If gold is not able to sustain a rally from current levels, we would expect another wave of selling to push prices lower-and represent an excellent buying opportunity for the long-term investor. 

The Week Ahead In Gold

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To say the past trading week for gold was uneventful would be an understatement. The yellow metal traded in a very tight range as the bulls continue to try to find reasons to buy. The bears, on the other hand, are likely looking at a stronger dollar index and impending interest rate hike as reasons to sell.

 

The dollar index has seen strength in recent action as the British Pound continues to decline. The potential for a “hard” Brexit appears to be sinking in at this point, and the dollar could see some ongoing support if the pound keeps falling.

 

Speaking of interest rate hikes, Fed Chairwoman Janet Yellen spoke on Friday, and while she did not directly address the current economic scenario or the likelihood of a December interest rate hike by the central bank, her commentary was considered to be dovish by some analysts.

 

What might this mean for gold and precious metals?

 

The fact that Ms. Yellen appears to be maintaining a dovish bias could potentially set a lower baseline for future rate increases. Perhaps such a tone could be indicative of a very slow pace of hikes, with only one or two hikes being seen over the next year.

 

Interestingly, this comes at a time when some are hoping the Fed raises rates-and soon-so they will be able to lower them again once the next recession hits.

 

Billionaire investor Wilbur Ross sees a recession coming down the pike within the next 18 months, and fears the Fed will lack the ammunition necessary to fight it. In an interview with Marketwatch.com, Mr. Ross stated: “The Fed’s toolbox is basically empty. They need to replenish that toolbox in order to have a way to help, if and when we get into this recession that I see in the next 18 months or so.”

 

Make no mistake, this is not a call to raise rates because the economy is doing great, but rather it is a strategic call to hike rates before the next downturn hits.

 

Such a scenario could potentially be bullish for gold, silver and other perceived safe haven assets. Much has been made of the possibility of a rate hike from the Fed this year, although in the grand scheme of things, how big of a deal is a 25 basis point hike?

 

Gold could potentially find support near current levels, although the possibility for more downside does exist. The stronger dollar and idea of a December interest rate hike by the central bank may weigh on gold for the time being, but the yellow metal may find plenty of buyers once the next hike does occur.

 

For the time being, gold may find itself in somewhat of a holding pattern. Investors will continue to monitor the data stream very closely, although at this point a December hike looks like a foregone conclusion. The gold bulls will also likely welcome any potentially bullish catalyst. Some recent concerns over Deutsche Bank and the Chinese economy could make headlines again, and could potentially fuel a rally in gold and perceived safe haven assets while driving selling in stocks and risk assets. 

The Week Ahead In Gold

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 Gold and silver have been hit hard in recent trade. The question is: Will the bulls be able to stop the bleeding or is there more downside in store?

 

Gold started the week well above the $1300 level, in fact, gold at one point on Monday was trading for over $1320 per ounce. Silver, on the other hand, started the week off trading well above the $19 per ounce level. Then the selling began…

 

Gold and silver were hit hard on Tuesday, with gold falling by over $40 per ounce and silver shedding more than a dollar per ounce. The question is why.

 

Some analysts suggested that some “big player” fund activity may have been to blame, while others even suggested that embattled Deutsche Bank could have something to do with it.

 

The most plausible explanation, in our view, is that some large selling did take place amidst a lack of any fresh bullish inputs.

 

Gold and silver had not been able to carve out new fresh highs in recent months, and the uncertainty surrounding interest rates in the U.S. appears to be abating. The Fed has made it fairly clear that it intends to-and wants to-raise interest rates before the end of the year.

 

This has caused some bumps in the stock market but nothing of any significance yet. Higher crude oil prices have added some bullish sentiment to the equity market, helping to counteract any negativity over a December rate hike.

 

Bond and note prices have been falling as interest rates have been on the rise. The dollar index has also been moving higher as Brexit starts to become more of a harsh reality and the idea of higher U.S. rates takes hold.

 

More Brexit news is likely to become a center of focus for global investors, and investors will continue to watch the data stream in the U.S. Although difficult to imagine at this point, the Fed could still decide to hold off on a 2016 rate hike. It would likely take a major string of very poor economic data or perhaps some type of negative global economic headlines. Extremely unlikely, but still possible.

 

This week, investors will be watching the latest readings on MBA Mortgage Applications, Weekly Jobless Claims, PPI, Retail Sales, Consumer Sentiment and more. There will also be several Fed officials involved in various speaking engagements throughout the week.

 

Gold and precious metals are currently lacking any fresh bullish inputs, and unless some type of catalyst is seen, the metals could potentially remain under pressure. This catalyst could possibly be further negative news about Deutsche Bank, a larger breakdown in equity markets or any more dovish commentary from the Fed or stimulative action by other central banks.

 

Significant declines in “paper” gold or silver can represent fantastic buying opportunities in physical gold or silver. For now, we are of the opinion that sub-$18 per ounce silver represents an excellent value and great buy for the long-term investor. We would also expect gold to be bought at current levels, and for physical buyers to become more and more aggressive if prices decline further. 

The Week Ahead In Gold

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With the most recent FOMC and Bank of Japan meetings out of the way, markets will turn their attention elsewhere.

 

That “elsewhere” appears to be rising concerns over the health of Deutsche Bank.

 

Deutsche Bank shares have been hit very hard this year, dropping nearly 60 percent thus far. Unfortunately for shareholders, there may be more pain in store.

 

Last week, a report surfaced that some of the investment bank’s hedge fund clients were pulling some excess cash and positions from the bank. The report had an immediate effect on markets, with the S&P 500 dropping quickly by 15 or 20 handles. Although this drop was not too severe, it may be indicative of how markets may react to further negative news for the embattled bank.

 

Deutsche Bank brass has tried to put this most recent report into perspective, citing the fact that the bank has many clients and that these withdrawals were nothing more than a drop in the bucket. That may very well be true-the question then becomes whether or not more customers will begin to pull assets.

 

Deutsche Bank recently settled a lawsuit over price fixing in the gold and silver markets. The bank is currently in negotiations to settle another lawsuit over subprime disclosures. A settlement figure of $14 billion is apparently being thrown around, and such a settlement would hit the bank hard.

 

Some have even referred to the bank as the world’s riskiest, and a collapse could potentially have very far-reaching implications for the global economy.

 

The situation seems eerily similar to the crises faced by Citigroup in 2008 and 2009. Then-Secretary of the Treasury Henry Paulson orchestrated a bailout for Citi, and the bank has since gotten back on more solid footing.

 

Deutsche Bank, however, may not be so lucky. Thus far, German officials appear unwilling to entertain a bailout for the bank should it become necessary. If push comes to shove though, you have to wonder if Germany will be left with no choice but to put together a taxpayer funded bailout for the bank.

 

While a failure of Deutsche Bank may not carry as much global risk as did the crises of 2008, a collapse could have extremely significant effects for the global economy. We expect this situation to be watched very closely in the coming weeks and months, and any further signs of deterioration in the bank’s position could fuel severe market volatility and possibly drive buying in perceived safe haven assets such as gold and silver.

 

In addition to any new developments on Deutsche Bank, investors will be watching the data stream closely this week. There are also several Fed officials speaking this week that could potentially garner some investor attention. The data highlight of the week, however, will be Friday’s Employment Situation report for September. A strong number could all but seal the deal for a December rate hike from the Fed, while a significant miss could potentially cause the Fed to rethink its plans and perhaps even hold off on tightening again until next year.