The idea of gold and precious metals lacking any fresh, bullish catalyst has been an ongoing theme for some time now. Could that be about to change?

 

Last week, the announcement by FBI Director James Comey that the bureau was reopening the email investigation of Presidential candidate Hillary Clinton caused quite a stir among lawmakers and politicians. Markets even took notice, with gold catching a bid on the news.

 

This revelation comes just days before the highly anticipated U.S. Presidential election, and could potentially have an impact on the results.

 

Needless to say, this election brings with it a large amount of uncertainty. The country seems very divided, and there appears to be very little, if any, common ground between the two candidates.

 

Some analysts have voiced concerns over a potential Donald Trump victory. It seems that many people feel Trump has not done enough in terms of detailing exactly how he plans to accomplish some of the policies he has suggested. Many apparently view a Trump victory as a significant risk to not only the country’s geopolitical standing but to its economy as well.

 

A Clinton victory, on the other hand, could bring with it its own degree of uncertainty. The latest news that the investigation into her emails has been reopened may only further add to investor anxiety. And what if Mr. Trump is unwilling to accept a Clinton victory? What if the shift in power does not go as smoothly as planned?

 

The bottom line? It may be an interesting few days as the election quickly approaches.

 

Although markets may be content at this point simply trading sideways until the election has come and gone, the potential for increasing market volatility does exist.

 

Should investors become more nervous (as has already been evident by a rising VIX), gold and other perceived safe haven assets could potentially see additional buying interest.

 

Gold may have to contend with a rising dollar, however…

 

While it is widely expected that the Fed will take no action at its November meeting, odds of a December interest rate hike look pretty good at this point.

 

The dollar has been steadily rising on the notion of rising U.S. rates, and the sinking Great British Pound has also fueled buying in the greenback. The dollar is nearing the top end of its two year trading range, and a breakout above the 2015 highs near 101 on the dollar index could potentially see a fresh leg higher in the currency.

 

Such a move could act as another significant drag on higher gold prices, especially if gold remains lacking any fresh, bullish inputs.

 

Once the smoke clears from the U.S. election, gold and other markets may show their hands for the rest of the year, and start making more sustainable directional moves.

 

Although gold has had an impressive 2016, the market remains vulnerable to further selling pressure in the absence of any significant upside. That being said, however, a fresh leg lower could potentially be the final down move before the yellow metal finds more solid long-term footing. 

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. 

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. 

The gold market had a less than stellar showing last week, with prices remaining on the defensive and testing recent swing lows. This trend could potentially continue this week, as shifting rate expectations and a stronger dollar take a toll.

 

The gold bulls will need to take a stand-and soon-to stem the bleeding before it gets worse. The gold market may potentially see some volatility this week as investors look to square up positions ahead of the highly anticipated FOMC meeting announcement. .

 

On Wednesday, the FOMC will announce its decision on interest rates. While Fed Funds futures contracts are only pricing in a small chance of a rate hike this week, the possibility of action by the central bank does exist.

 

Assuming the Fed does not act, however, investor attention will turn to the central bank’s assessment of the economy and commentary on conditions. Investors will be looking for any further clues as to the timing and pace of any further rate hikes, and the possibility of a December rate hike will likely become a focal point.

 

The case for a rate hike has seen some ups and downs in recent weeks. Judging by recent comments made by several Fed officials, however, it seems the central bank is intent on raising rates before the end of the year.

 

Recent weakness in manufacturing and even a disappointing jobs report for August may potentially be offset by decent activity in housing and an uptick in inflationary pressures. The Fed may, however, want to see the September jobs data before actually pulling the trigger on a rate hike.

 

In addition to the FOMC meeting, investors will digest the latest readings on Housing Starts, the Housing Market Index, MBA Mortgage Applications, Weekly Jobless Claims, Existing Home Sales, Leading Indicators, PMI Manufacturing Index Flash and more.

 

If the Fed signals it will maintain its current data-dependent approach, the data stream over the next several weeks will be very closely scrutinized. Markets could see increasing volatility as investors try to position for a possible rate hike. On the other hand, if the data seen in the coming weeks fails to meet expectations, it could bolster the dovish case and stocks could see renewed buying interest if expectations for a rate hike this year see a significant decline.

 

Although gold could see further selling if the Fed does take action, the potential downside may be fairly limited. It is difficult to imagine a scenario in which rates rise fast and furiously, in fact, rates may see very limited upside for some time. On a global scale, the environment of low to zero interest rates appears to be far from over. Although the ECB and Bank of Japan disappointed markets recently with a lack of more significant stimulus measures, it may not be long before these central banks are forced to roll out more easing plans.

 

The notion of low global rates and ongoing easing may keep gold well-supported. Although the dollar may see further upside and possibly weigh on gold, such upside may be limited as any additional changes in rates are likely to be very slow and incremental.

 

In addition, stocks have shown some signs of cracking recently and a hike by the Fed may cause more selling to take place. As investor capital starts to flow out of stocks and risk assets, investors will be looking for alternative asset classes to put that capital to work in. We are of the opinion that a significant amount of that capital could find its way into gold and other perceived safe haven assets. 

This past week the gold market saw another relatively tight trading range. The market is seemingly being held hostage right now by changing interest rate expectations. Friday’s non-farm payrolls data is likely to shift rate expectations even further, and speculation on the Fed’s next move-or lack of-will almost certainly remain the center of focus for investors.

                       

The Fed symposium from Jackson Hole, Wyoming last week brought with it some hawkish rhetoric from some Fed officials. Fed Chairwoman Janet Yellen discussed her views, and voiced her opinion that the the case for another rate hike has strengthened. Ms. Yellen did not provide a timetable for such a move, however, and almost certainly wants to keep the central bank’s options open.

 

Fed Vice-Chairman Stanley Fischer even went so far as to allude to the possibility of two rate hikes this year.

 

Overall, markets did not display much of a reaction one way or the other. While the commentary was certainly more hawkish sounding, perhaps investors need a little more convincing.

 

Friday’s Employment Situation report will likely not help the policy hawks. According to the U.S. Department of Labor, the country added 151,000 jobs in August. This reading was well below consensus estimates of 175,000 jobs added and could potentially take a September rate hike off the table.

 

Both gold and silver saw a nice bounce following the jobs data today as some short covering likely took place and bargain hunters stepped in.

 

The question now becomes whether any follow-through upside will be seen in gold and silver.

 

The coming week will be a short week due to the Labor Day Holiday and trading volumes may be light the rest of the week. It will also be very light in terms of data. Markets will get the latest readings on MBA Mortgage Applications, Weekly Jobless Claims, ISM Non-Manufacturing, the Fed Beige Book and more.

 

Following the August jobs data, investors as well as the Fed may pay very close attention to the data stream. The central bank even want to see a rebound in the September jobs data before taking any action.

 

Any significant weakness seen in key data points could potentially take a rate hike off the table for September or possibly even December. For right now, however, the Fed seems fairly intent on hiking at least once this year. Some might argue that such a move is still premature and that the central bank may just want to preserve its credibility.

 

Gold and silver may be quite vulnerable to key data releases over the coming weeks, with strong data weighing on the metals and any weakness potentially fueling further buying.

 

The interest rate debate is set to continue for the time being, and this debate could go on until year’s end. In the meantime, gold and precious metals will be driven by rate expectations and overall risk appetite. As heavier trading volumes return to the market next week and the week after, stocks could also see more action. Equities have lingered not far from recent all-time highs, and could be getting a little frothy. Any significant selling in stocks could also be supportive for gold and precious metals, as a large increase in risk aversion could spur heavy buying in perceived safe havens such as gold, silver and treasuries.