To tighten or not to tighten, that appears to be the question…

 

After a relatively quiet week from a data perspective, investors are left pondering whether or not the Fed will raise interest rates again in September or December. While much of the U.S. economic data has painted a picture of ongoing improvement in activity, there are still several areas of concern both domestic and foreign.

 

The highlight of the past week was undoubtedly Wednesday’s FOMC meeting minutes. The committee elected to hold rates steady-at least for now-and did not give any real concrete idea of when the next hike may take place.

 

The FOMC seemed considerably more upbeat about the economy, and described household spending as “growing strongly,” and referred to the labor market as “strengthening.” The housing sector appears to be viewed as a mild positive, but the factory sector may be characterized as mixed.

 

While expectations for a rate hike at the latest meeting were almost non-existent, odds of a September or December hike have been trending higher. While the Fed does see some significant improvement, it also seems very leery of raising rates prematurely. In fact, it seems as if one or two sharply downbeat economic reports could be the difference maker at this point. Any significant misses could potentially keep the central bank on hold until early 2017.

 

The upcoming trading week will feature some key economic releases, but may be on the quiet side as many investors take last minute vacations before summer’s end. Markets could find themselves simply drifting until more robust trading volumes return.

 

Gold had a tight trading range once again this past week, and was held to a range of just over $20 per ounce. The market could be gearing up for a significant upside breakout or downside breakdown, and the longer prices stay sideways the more significant the move may be. It would seem that many precious metals investors are awaiting more clarity from the Fed before taking a position.

 

The recent dip in gold may be bought again by bargain hunters, and for now the bulls still seem to have the advantage. That could change quickly, however, if the current dip becomes a larger correction. Gold ended last week on a sour note, falling by $11 per ounce as some profit taking likely took place and as sell stops were triggered. The market could find itself on the defensive to begin this week in the absence of any fresh bullish inputs.

 

Gold investors will also continue to watch the dollar index, which has been on its heels lately. The recent slide in the dollar would seem to indicate that many investors do not believe another rate hike will come in 2016, and that even if the Fed did hike, the pace of further hikes is likely to be very slow and incremental.

 

Gold may remain well-supported for the foreseeable future even if the central bank does tighten. Ongoing easing measures in many areas of the world along with the spread of negative interest rates may keep interest in gold strong, and any signs of economic weakness or a top in stocks could fuel a sharp rally in gold from current levels. 

The gold market wrapped up the trading week with a “thud” as prices got hit hard, declining by over $25 per ounce or nearly two percent. The catalyst for Friday’s selling was the release of the Employment Situation Report for July.

 

According to the U.S. Department of Labor, the country added 255,000 jobs last month while the unemployment rate ticked a hair higher to 4.9 percent. To put this jobs number into context, consensus estimates were looking for an increase of 180,000 jobs.

 

Of particular note, the report showed an uptick in the labor participation rate, which could be indicative of improved overall sentiment among those who are out of work. The report also showed an increase in hourly wages, which rose by $.8 or a 2.6 percent annualized rate.

 

As if that was not enough, revisions for both May and June showed more robust job creation than previously thought. Stock investors clearly felt very encouraged today by the news and bought up equities driving some indices to fresh all-time highs. Interest rates rose as investors sold treasuries, apparently feeling better about the economic outlook and hungrier for risk.

 

Gold and silver, on the other hand, saw some steep declines as risk aversion faded today in light of the jobs data. The question many investors may now be asking themselves is:

 

Will this be another buyable dip in gold or the beginning of a larger move lower?

 

For now, the overall trend in gold still points higher. The next few days may tell us if that trend is set to continue.

 

As has been the case for some time now, positive economic data like what was seen today will likely fuel further speculation of another interest rate hike in September or possibly December. Is it enough to sway the Fed to take action? Probably not. The central bank may want to see additional improvement elsewhere before becoming more aggressive on rates.

 

One could also make the argument that the Fed will avoid being too eager to tighten given the ongoing low rates and QE in other parts of the world. The era of low rates and easing is far from over, in fact, the Bank of England just this week introduced fresh stimulus measures in an attempt to counter the expected negative economic effects of Brexit.

For the time being, gold may find support from the idea of rates remaining at current levels throughout the rest of the year. A good string of more upbeat economic data, however, could potentially drive a shift in sentiment and rate expectations.

 

The week ahead is light from a data standpoint, and markets may simply drift on low summer trading volumes. If stocks continue moving higher, gold may find itself on the defensive, and further downside may be seen.

 

In addition to stronger equity markets, gold may have to contend with a rising dollar. The greenback saw a nice bounce Friday after the jobs data was released, and has recovered much of the losses seen following last week’s disappointing GDP data.

 

More positive economic signs may keep the dollar on the offensive, as interest rate expectations may boost demand for the currency.

 

The recent rally in gold is likely in for a good test in the coming days and weeks, and near-term price action may provide some solid clues as to the underlying strength of the market. For now, we continue to look for dip-buying unless proven otherwise. 

The gold market has been on its heels in recent weeks, as equities have pushed to fresh all-time highs and overall risk aversion following the June 23^rd Brexit referendum has dissipated. While we expect dips in gold to continue to be bought by investors, there is the possibility of additional downside in the yellow metal.

 

Recent price action in gold may also be indicative of position squaring and profit taking before two key central bank meetings this week.

 

On Wednesday, the U.S. FOMC will conclude its two day meeting on monetary policy. Fed Fund futures contracts show only a miniscule chance of a rate hike this week, but the odds of another rate hike in the coming months appear to be on the rise. Of course, general opinions on the pace and timing of further rate hikes can change quickly, and investors will be paying close attention to the central bank’s commentary regarding rates.

 

A more hawkish sounding Fed could potentially boost the dollar and drive selling in gold and precious metals, while commentary that is more on the dovish side of the ledger could potentially put a halt to the recent dollar rally and give metals a boost.

 

The Bank of Japan will also be meeting this week and speculation has grown that the central bank will announce further easing measures. The outcome of this meeting could be particularly interesting as either outcome could be considered bullish for gold prices.

 

If the BOJ does ease further, rates will be driven further into negative territory in another sign that the era of global money printing and low, zero or even negative interest rates is far from over.

 

On the other hand, if the BOJ stands pat for now, it could give the yen a boost, and gold prices frequently show a positive correlation to the Japanese currency.

 

While the ECB did not ease further at its policy meeting last week, it did seemingly leave the door wide open for further stimulus measures as the region continues to fight deflationary pressures and the effects of Brexit remain unknown.

 

The bottom line in this really seems to be: How much can the U.S. raise rates while so many other nations are still easing?

 

It would seem to make sense that the path of additional hikes by the Fed will remain very slow and incremental. Overly aggressive changes to monetary policy could not only put the brakes on domestic economic activity, but a divergence between the U.S. and other nations could potentially stoke volatility across markets including currencies, interest rates and more.

 

While gold investors may be taking a wait and see approach this week ahead of these central bank meetings, we would expect buying interest in the yellow metal to resume.

 

On another note, as the U.S. Presidential election approaches, it stands to reason that gold may see further interest as the uncertainty surrounding the potential outcome drives investors from risk assets into perceived safe havens.

 

There have already been numerous pieces written about the potential effects on gold that a Trump victory could have, with an analyst from ABN Amro even suggesting that a Trump Presidency could push gold prices higher by $500 per ounce or more.

 

This is a topic that will likely drive gold in the coming months, as any significant changes in monetary policy are unlikely. In the short-term, however, gold will likely take its cues from central bank activity, equity markets and overall risk appetite or aversion. 

The gold market continues to show several signs of significant underlying strength and appears poised for further upside. With the $1400 per ounce level within site, the bulls will likely continue to push for higher prices as ongoing risk aversion keeps buyers on their toes.

 

Investors are getting numerous mixed signals currently, and some significant market volatility could potentially be in store. While Friday’s Employment Situation report showed the U.S. added 287,000 jobs in June and was far beyond consensus estimates, the reality is that a large number of people have simply given up and are not actively looking for work.

 

Stock investors cheered the release of the non-farm payrolls data, and drove the S&P500 to within easy striking distance of fresh all-time highs. On the other hand, however, interest rates remain near all-time lows and thus far have not shown signs of bottoming.

 

In other words, the bond market is saying economic troubles may still lie ahead while the stock market is choosing to shrug off many of the numerous issues that could potentially weigh on global markets.

 

This divergence between stocks and yields will likely not last very long, and at some point something’s got to give.

 

While the gold market has many reasons to see higher price levels, risk aversion and concerns over the global economy are likely one of the main drivers currently. It would seem that both the treasury markets and the precious metals markets see challenges ahead.

 

The fact that stocks recovered almost immediately from the sell-off seen following the June 23^rd Brexit referendum may not point to underlying strength in equities or companies, but rather the fact that stocks may just be the only game in town right now.  

 

With the ten year note yielding less than 1.4 percent, many investors seem content taking their chances with equities.

 

Unfortunately, the rally in equities remains vulnerable to an abrupt end, and a reversal that could make 2008 or 2009 look like a day at the beach.

 

Investors are already looking to gold and other perceived safe havens for refuge, and should the stock market bubble suddenly pop, gold could potentially see a massive influx of investment capital.

 

Perhaps continuing to fuel the stock market bubble is the notion of lower rates for longer. Even in spite of Friday’s non-farm payrolls data, many key economic indicators point to sluggish growth. Given ongoing difficulties in the U.S. and the state of the global economy, it is difficult to imagine a scenario in which the Fed would become more aggressive regarding monetary policy.

 

So for now, it seems that the easy money spigot will remain fully open, and if necessary, the central bank could even cut rates again in the future.

 

The current situation with interest rates could be considered bullish for both stocks and gold, with some key differences.

 

Rates are not likely to rise by any significant amount anytime soon, and that may keep gold and precious metals on the offensive. On the other hand, however, stocks may only run so far before extreme valuations and even a hint of higher rates take their toll.

 

The bottom line may be this: Equity investments here could be extremely risky given the upside seen in stocks in recent years and the economic weakness seen around the globe. Gold, on the other hand, could be at the beginning stages of a prolonged bullish cycle that could potentially see prices several hundred dollars or more per ounce higher than current levels.

 

Given the uncertainty surrounding the possible effects of Brexit, the spread of negative interest rates and a weak global economy, what do you think is the better bet?

“Brexit” has become a reality. Now what? That is the question being asked by investors around the globe following the historic vote by the people of Great Britain.

 

Things took a dramatic turn late last week from the recent optimism being expressed by investors. Heading into Thursday’s vote, it seemed the “remain” camp had a distinct edge and the U.K. would remain a member of the European Union.

 

Things started heading south quickly on Thursday night as the tallying process got into full swing. Global markets were paying close attention as the results started being compiled, and significant volatility was seen in stock index futures, interest rates, currencies and other markets.

 

At one point Thursday night, the broad market S&P 500 futures contract went “limit down” and trading was halted. The British Pound was heavily punished as well, hitting its lowest level seen in over 30 years at one point. Interest rates fell and crude oil was sold off.

 

Gold and silver, on the other hand, saw heavy buying.

 

By the time the dust had settled in the U.S. on Friday, the S&P 500 had lost over 3.5 percent, the Dow Jones declined by 3.39 percent and the Nasdaq shed well over four percent. Crude oil lost over five percent while the British Pound was slammed for a decline of nearly eight percent (well off of the session lows).

 

Carnage- complete and total carnage- is really the only way to describe much of the price action seen in markets on Friday.

 

The immediate question now is: Is the worst of it over?

 

Probably not…

 

The fear of the unknown is a powerful thing, and the uncertainty surrounding the implications of Brexit are far-reaching. The reality is that no one can say for sure just how this will affect global financial markets. The potential “ripple” effect is already being seen as Scotland is reportedly revamping efforts for an independence referendum.

 

Who will replace British Prime Minister David Cameron?

 

How will the Brexit affect U.S and Canadian businesses in Europe?

 

Will this weaken the European Union?

 

These are just a few of the major questions that investors will be complicating. Unfortunately, the answers to these questions may not come as quickly as many hope.

 

The hard truth is that this process will not take weeks or months, but several years.

 

In the meantime, it is impossible to say just what effects this historic vote will have on the global economy.

 

One thing is for sure, though, and that is that the vote will leave a number of unanswered questions and may add considerable uncertainty to global markets.

 

Investors don’t like unknowns and they don’t like uncertainty.

 

Just look how quickly investors dumped stocks and risk assets and sought the perceived safety of treasuries and gold.

 

Gold saw gains of nearly 4.7 percent on Friday, while silver rose over 2.5 percent.

 

This week could potentially see more panic selling as investors try to gauge the ramifications of the Brexit vote and stocks may remain under pressure as Brexit overshadows any economic optimism. Oil and other risk assets may also see further selling, while treasury yields are likely to remain on the lower side of the ledger.

 

Who knows just how far the British Pound may fall….

 

Gold appears headed for higher ground as investors may seek out alternative assets in which to put capital to work. An increase in market volatility could potentially drive flight to safety buying in the yellow metal, and a significant leg higher in gold could be in the cards.