The Week Ahead In Gold

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Fortunately for the gold market, the year will soon be coming to a close. For many weary gold bulls, the closing of the books on 2016 cannot come soon enough. Despite the selling seen in the yellow metal over the last several weeks, however, it should be noted that gold is still up on the year.

 

Better days could potentially lie ahead for gold, and the start of the New Year could bring with it some very interesting changes and market action. Although all may seem well today, the global economy has numerous issues that could potentially put a halt to the current rally in risk assets and put a bid back into gold and other perceived safe haven assets.

 

For starters, the current rally in stocks and the dollar is built upon nothing more than hot air. Plans for tax cuts, increased fiscal spending and job creation all sound fine and great, but thus far that’s all it is-talk.

 

Although stocks could see an ongoing boost if such measures were in fact implemented, there are two key considerations:

 

  1. It remains unclear if tax cuts, a massive infrastructure spending program and other potential economic policies will pass muster with Congress.
  2. According to some analysts, the effects of such measures may not provide any long-term sustainable boost to growth.

 

In other words, the markets could be setting themselves up for disappointment. The current rally may march on into the first several weeks or months into Trump’s first term, but investors will soon begin to get a clearer picture on what may or may not be expected from a policy standpoint.

 

Like an overinflated balloon, if investors begin to get the sense that changes in policy are lacking in the “shock and awe” department, much of the hot air from the rally may be released, deflating stock prices along with it.

 

An equity market that begins to show signs of cracking could potentially be very bullish for gold, and the yellow metal could potentially benefit from a significant asset rotation sometime in the New Year.

 

We also feel that China could be a very large wildcard in more ways than one, and that the world’s second largest economy could potentially have a big impact on gold prices in the year to come.

 

It is no secret that China is going to have to deal with its own debt issues at some point, and that the Chinese economy may not be as strong as believed. Worries over China put stock investors on the defensive to start 2016, and some equity markets got off to their worst start to the year on record. Although stocks may head into the New Year with a full head of steam, worries over China can resurface quickly and have the power to put a significant dent into global appetite for risk.

 

As if this was not enough, markets will now also likely pay close attention to Trump’s dealings with China. Trump has made it clear that he intends on taking a hard line with China, and relations between the two counties could potentially see some changes this year. A trade war or other issues could potentially ignite a flight to safety that could possibly benefit gold and other perceived safe haven assets.

 

Gold may see a renewed interest in the coming weeks. For the time being, the market may remain on the defensive, and prices could head even lower than the recent lows. Once much of the current euphoria begins to subside, however, and the dust begins to settle, gold may once again shine as investors look to diversify away from risk assets.

 

At current price levels or even lower, we believe that gold represents an excellent value for the long-term investor and that gold will once again see higher prices in the year ahead while potentially providing a meaningful hedge against many of the potential economic and geopolitical issues that could surface. 

The Week Ahead In Gold

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The highly anticipated FOMC meeting has now come and gone, and as expected, the central bank raised the Fed Funds rate by 25 basis points. The move by the Fed was not a surprise at all, although the central bank did appear to catch markets a bit off-guard with its latest projections.

 

The Fed’s dot-plot now calls for three interest rate hikes next year as opposed to the market’s previous expectations of two hikes. In the grand scheme of things, an extra 25 basis point hike may not seem significant. The additional potential hike does, however, point to a more hawkish Fed.

 

Inflation expectations have been ramping up since the Trump Presidential election victory last month. His calls for increased fiscal spending and tax cuts have been called highly inflationary, although it remains to be seen if many of the discussed proposals will actually become policy.

 

It is also important to remember that not too long ago, it was projected that the Fed would hike rates four times in 2016, yet the central bank was only able to hike once. Rate expectations can and do change quickly, and there are numerous reasons that three hikes may not be seen next year. Either way, the case for a slow and steady pace of rate hikes remains intact, and could be bullish for gold.

 

For the time being, the Trump rally remains in full force, and markets have thus far not shown any real signs of reversing course. Stocks remain near recent all-time highs, and could potentially see even further gains before the rally has run its course. The dollar index also is poised to keep moving higher, and the stronger greenback is almost certainly having a negative effect on gold. Interest rates also continue to rise and bond prices have yet to stem the recent bleeding.

 

Of course, markets do not typically go straight up or straight down, and we would expect to see some type of reversal in these markets-perhaps even a significant reversal-before they possibly continue in their current trends.

 

The perfect storm of stronger risk appetite, higher equities, a higher dollar and rising rates has beaten gold down considerably. There are, however, numerous reasons that gold can still shine bright in 2017.

 

Some of those reasons include the potential for a massive banking crises and significant volatility in the Eurozone, ongoing tensions with Russia and increasing inflationary pressures.

 

Gold may remain on the defensive in the near-term, although the market may be close to a major turning point. Sentiment surrounding the gold market has been approaching a bearish extreme, and once the last gold bull has thrown in the towel, the market could potentially turn and turn hard.

 

If current outside market trends continue, gold could see another wave of selling that could potentially take prices down to the $1080 area. Such a move could very well drive long capitulation, and could potentially mark a medium to long-term low in the price of gold.

 

We believe gold represents an excellent value at or near current levels, and view any further downside in the gold price as an excellent opportunity for the long-term investor.

The Week Ahead In Gold

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The gold market continued its recent losing ways on Friday, as the yellow metal finished decidedly lower to end the trading week. In fact, gold is now on the verge of what could be a significant, fresh leg lower in price that could potentially see the market test sub-$1100 per ounce levels.

 

A test of $1080 cannot be ruled out, and in fact could potentially set the market up for finding a more sustainable bottom.

 

The same issues that were bothering gold investors a month ago are still bothering gold investors today. A combination of strong risk appetite, higher equities, rising interest rates and a stronger dollar index are all taking a toll on the gold market.

 

Stocks carved out fresh all-time highs once again on Friday to finish the trading week with a bang. Although seemingly more and more analysts are now referring to the rally as being “overdone,” “overbought,” or “running out of steam,” there simply is no telling just how high equities might climb. As new highs are reached, there is simply little to no overhead resistance to keep a lid on prices, and stocks are likely to drift higher if nothing else.

 

The rise in interest rates seen since the Trump election victory has been swift and severe, and already appears to be taking a toll on some areas of the economy like mortgage refinancing.

 

The Federal Reserve is set to meet this week and it is widely expected that the central bank will raise interest rates for just the second time in a year. It would seem, however, that much of the heavy lifting has already been done with rates in the last few weeks, and the Fed hike has likely been fully priced into the market at this point.

 

Although seemingly counterintuitive, the Fed actually taking action could potentially help the precious metals find a near-term bottom.

 

While an interest rate hike of 25 basis points seems to be a foregone conclusion at this point, investors will likely now focus their attention on what the central bank may or may not say regarding the pace of hikes in 2017.

 

Donald Trump is considered by some to be more hawkish, and some have suggested he may try to influence the Fed. The Fed will likely try to steer clear of any discussion about the potential effects of Mr. Trump’s policies, and may not offer a ton in the way of guidance for next year. As of right now, the market is pricing in two rate hikes for 2017, which would likely come in June and December.

 

The central bank maintaining its stance of slow and incremental rate hikes could potentially be bullish for gold and precious metals, and overblown fears of accelerated rate hikes could potentially fade based on the central bank’s commentary.

 

It is worth noting that a historic event took place last week that could be a potential game-changer for gold. A new gold standard was agreed upon by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the World Gold Council. Changes made to Sharia law could now potentially open the door to gold investing for 1.6 billion Muslims all over the world.

 

This new source of demand could potentially have a significant impact on this important asset class, as Muslims make up nearly 25 percent of the world’s population. 

 

The Week Ahead In Gold

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Although the gold market ended last week on a positive note, the bulls have their work cut out for them undoing the recent chart damage inflicted on the yellow metal in the aftermath of the surprising Donald Trump election victory in early November.

 

That being said, the precious metals are showing some signs of bottoming, and thus far the bears have not been able to push prices beyond the recent low prints.

 

Friday’s Employment Situation Report was not exactly stellar. The U.S. Department of Labor reported that non-farm payrolls saw 178,000 jobs created in November while the unemployment rate ticked lower to 4.6 percent.

 

October jobs data was revised lower, while September jobs data was revised higher. Of particular note is the downtick in the unemployment rate. While at first glance this figure seems encouraging, it can also be misleading. A decline in the participation rate was reportedly the driver behind the lower rate, not faster job growth.

 

All things being equal, this latest jobs report will likely keep the Fed on track for an interest rate hike at its next meeting later this month.

 

Investors may now turn their attention to the pace of future rate hikes from the central bank.

 

Markets are now pricing in two additional interest rate hikes in 2017, a forecast that could change rapidly if the data stream shows further strength. For the time being, however, the data stream continues to show some mixed signals, and the Fed is likely to stick with a very gradual approach as it looks to normalize monetary policy.

 

Key markets that can have a direct effect on the gold market including stocks, treasuries and the dollar index have all seen strong moves in the last three weeks. Those moves could, however, be coming to an end, at least in the short-term.

 

Some analysts have been suggesting that the equity rally has been overblown, and that a pullback in stocks is becoming more likely. Likewise, some believe that the sharp move lower in treasuries has also been overextended, and that a reversal is likely.

 

Markets have been moving on the notion of stronger economic growth driven by tax cuts and increased government spending. Interest rates have been moving based on the idea that Trump is more of a hawk than a dove, and that his plans are likely to fuel inflation.

 

At this point, all of this could be considered conjecture, and sentiment among investors has the potential to change quickly if some of the key policies recently discussed are not able to be implemented.

 

Investors will also not likely forget that much of the world remains engaged in ultra-low rate policies and quantitative easing. Even if the U.S. economy gains further steam, the global economy may remain sluggish and see weak growth for some time to come.

 

Gold may already be in the process of forming a meaningful bottom, and some analysts have already suggested significantly higher gold prices by the end of the year. Of course, much remains to be seen, but long-term investors are likely to remain focused on the potential benefits of gold ownership and come to the conclusion that many of the reasons for buying gold in recent years still exist today.

 

Those same investors could then potentially view current gold prices as a substantial bargain, and increasing demand could send the yellow metal higher once again.