The Week Ahead In Gold

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The gold market is getting off to a slow start to begin this holiday-shortened trading week. Despite numerous potentially bullish developments in recent days, gold investors appear willing to book some profits at current levels after prices hit a one month high in recent action.

 

The upcoming mid-June Fed meeting is likely the main catalyst for any selling in the yellow metal at this point, as investors brace for another rate hike from the central bank. This week will be particularly important from an economic data standpoint, and there will also be numerous Fed officials speaking at various engagements throughout the week.

 

Although the “Fed-speak” this week could potentially provide further clues about the timing of the next hike and additional hikes to come, the employment data this week will also be very carefully scrutinized.

 

Friday’s Employment Situation report is projected to show an increase of 185,000 jobs in May, with the unemployment rate steady at 4.4%. If this figure comes out in-line with consensus estimates, it would mark the second straight month of solid gains following April’s 211,000 rise. A 185k number or better will almost certainly seal the deal for a June rate hike, and it would likely take a very significant miss at this point for the Fed to decide to delay.

 

The dollar index could also play a major role in gold’s fortunes this week as the greenback attempts to stem the recent bleeding. The dollar is in a three month downtrend at this point, and has given back all of the gains seen since the Trump Presidential election victory. Further weakness in the currency could potentially pave the way for higher gold and commodity prices. A more hawkish-sounding Fed, however, could give the dollar a boost and fuel some selling pressure in the metals.

 

Of course there is also the geopolitical landscape that investors need to pay attention to. President Trump recently completed his first overseas trip as President, and it certainly appears that he is more than willing to shake things up. U.S. relations with key allies may be headed for significant changes, and the future of NATO even seems uncertain.

 

Potentially significant changes on the world stage are coming at a time when tensions over North Korea and its nuclear program appear to be headed even higher. In another defiant act, North Korea recently tested another missile. Each and every test brings the nation one step closer to gaining the ability to launch a strike on the U.S. mainland or other key regions.

 

How this situation will play out remains unclear, but thus far the diplomatic route appears to be failing. It seems that the likelihood of some type of military intervention is rising, and the potential for armed conflict could underpin gold prices and other perceived safe havens.

 

The gold market may seem some selling in the near-term, but buyers may once again emerge following a hike from the Fed. The path of least resistance appears to be higher, and a breach of the recent trading range could potentially set up a significant leg higher in the coming months.

 

The Week Ahead In Gold

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The gold market has found itself on more solid footing in recent action as a mix of geopolitical issues and poor economic data drive buying. Although gold has been trending higher in the past couple of weeks, the question becomes whether or not the yellow metal will see enough capital inflows to breach its recent high around the $1300 level.

 

There is no question that the safe haven bid has been very supportive of gold, and with so many wildcards being seen right now in geopolitics, it is difficult to imagine a scenario in which safe haven buying in gold substantially dries up.

 

Investors will continue to monitor the any further developments concerning the Trump administration and the investigation into potential Russian meddling in the recent Presidential election. The recent firing of FBI Director James Comey along with the appointment of a special counsel to oversee the ongoing investigation into potential Russian interference are not likely to do overall investor sentiment any favors.

 

In the meantime, investors will also turn their attention back to the data stream and the upcoming Fed meeting minutes, due to be released later this week. It is a very busy week from a data standpoint, with markets getting the latest readings on key pieces of economic data including New Home Sales, Weekly Jobless Claims, Durable Goods Orders, GDP and more.

 

The Fed will likely be paying very close attention to the latest data, as some recent disappointments have fueled some speculation about the central bank possibly delaying an anticipated June rate hike. All things being equal, however, the Fed does appear set to continue with its previous plans of a June hike and another rate hike coming before year’s end.

 

The Fed meeting minutes this week may reiterate that the central bank remains on track to hike next month. Although a more hawkish tone from the central bank could deflate the gold market a bit, the market has likely already fully discounted two more hikes from the central bank this year. A more dovish tone, however, could fuel a significant amount of buying in gold that could potentially set up a test of the recent highs.

 

The dollar index will also be closely watched by investors, as the greenback has sunk to a fresh six month low. The dollar has now given back all of the gains seen after the Trump election victory, and appears poised for even more downside.

 

Recent price action in both gold and silver has been constructive. That being said, however, the markets may require a fresh bullish catalyst in order to breach their respective recent highs. This catalyst could potentially come in the form of a stock market collapse, a surprisingly dovish Fed or numerous geopolitical influences.

 

For the time being, the metals markets appear to be finding buyers on any significant sell-offs, and in the absence of any fresh catalyst appear to be quite comfortable in their recent trading ranges. This could potentially be viewed as an opportunity for accumulation, as any upside breakout in the metals complex could be quite significant.

The Upside Risk to the Canadian Dollar

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There’s no shortage of reasons why the Bank of Canada should start to think about higher interest rates. For example, in the last two years two Canadian provinces have implemented regulations to attempt to cool their overheated housing markets. However, to date prices are tracking higher. For first time in four years, Moody’s Investor Service, which is a debt rating agency, issued a warning and a collective downgrade on all six of Canada’s biggest banks. To add one more into the mix, the past six weeks saw the closest thing to a bank run in modern Canadian history. Depositors withdrew savings en masse from troubled alternative mortgage lender, Home Capital, because of their relation to higher risk mortgage holders. As we wait to measure the efficacy of fiscal or government policy, the Bank of Canada may have a hand to play.

 

The dovish nature of Bank of Canada Governor, Stephen Poloz has been witnessed on numerous occasions, and he still might hold one trump card. Canadian inflation through April is advancing at a pace of just 1.6%. This is far from levels of its G7 peers like the United Kingdom at 2.7% and the U.S. at 2.2%, and even the Euro Area seeing collective inflation at 1.9%. Into the summer months, with limited risk of higher energy prices, it seems likely Governor Poloz may lean on the muted level of inflation to keep him from raising interest rates while acknowledging the risks of consumer debt and inflated housing prices.

 

This past week, CIBC World Markets put out a report suggesting that because of how housing and associated costs were measured between the US and Canada, inflation between the two countries might not differ as much as economic statistics suggest. To save the technicalities, Canadian statistics may under gauge the increase in housing costs because inflation is tied to mortgage rates, and the US could be overshooting as they look at rental pricing. Regardless of which is more accurate, suggesting that the Bank of Canada is failing to capture the run up in home prices could eventually contribute to a convergence in interest rate policies. The differing policies over the past two years were casting a weight on the loonie when the US Federal Reserve began tightening. 

 

The Bank of Canada’s time on the sidelines may be limited. Ultimately, Canada’s major trading relationship with the US may see us import their inflation. The interconnectedness of our economy with theirs suggests this, and for this reason, interest rate policy in this nation can only lag that of the US for so long. The second part of the equation relates back to the status of the Canadian financial sector. Canadian banks are still acknowledged internationally as some of the globes safest, although the increased credit risk of their average Canadian borrower is what keeps everyone from short sellers to debt rating agencies to the IMF excited.

 

Canadian economists have not been anticipating a hike in interest rates until 2018. But higher interest rates could likely come sooner. The change in sentiment is the upside risk for the Canadian dollar.

 

 

The Week Ahead In Gold

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It was seemingly only a matter of time before North Korea tested another missile, and over the weekend the nation did just that. North Korea reportedly launched a Hwasong-12 missile on Sunday that reached an altitude of 2111.5 kilometers and covered a distance of 787 kilometers.

 

This latest provocation by North Korea is likely to keep markets a bit on edge, and may revive the flight to safety bid in metals and other hard assets.

 

The rhetoric has heated up considerably from both the U.S. and North Korea since Donald Trump took office in January, and it appears that the two nations could unfortunately be headed for a military conflict. Although many do not believe that North Korea has the capability-at least not yet-to strike the U.S. mainland, the nation could target Guam or other U.S. interests in the region.

 

Prior to the weekend missile launch, investors had been focused on the recent firing of U.S. FBI Director James Comey. The firing of Director Comey by the Trump administration appears to have raised numerous red flags, and some believe that Comey’s dismissal was essentially in retaliation for the ongoing investigation into potential ties between Trump’s campaign and Russia.

 

There is sure to be more headlines regarding this situation, and it is an issue that could potentially have far-reaching consequences. Some believe that Trump has abused his power, and talk of a “constitutional crises” is on the rise.

 

The ongoing conflict surrounding the administration could make it very difficult, if not impossible, for the President to get key legislation passed. In fact, the issue is just another of several that are acting as a significant distraction from the work at hand.

 

Recent discussions of an angry and frustrated Donald Trump possibly looking to shake up his staff may only add to the confusion and worry that seems to be hanging over the White House currently.

 

Although the stock market looks set to open the new trading week in the green, you have to wonder how much longer stocks can keep marching higher given the amount of geopolitical issues currently being faced. In fact, any one of a number of issues right now has the potential to fuel a significant sell-off in stocks and a massive spike in volatility. Such a scenario could potentially be extremely bullish for gold, and the yellow metal could see significant inflows of investment capital.

 

Not to beat a dead horse, but it is important to keep in mind that the rally in stocks over the last several months has been largely-if not entirely-based on the notion of tax reform and fiscal spending. At this point, it looks like any tax reforms are off the table for this year, and investors are still awaiting fiscal spending plans.

 

The more conflict that is seen around the Trump administration, the more difficult it may become to implement these key policies. If progress is not being seen, and if investors begin to get more anxious, the Fed could even elect to hold off on another rate hike in June. Although this may appear unlikely at this point, things can change in a hurry and a sizable sell-off in stocks could make the central bank think twice before taking action again. 

The Week Ahead In Gold

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The gold market has been on its heels in recent trade, and the yellow metal could potentially see another dip towards the $1200 per ounce level. Numerous issues have weighed on the gold market in recent weeks, and the notion of higher interest rates and a stronger economy appears to be taking its toll.

 

Gold had been moving higher as safe haven inflows saw the metal approach the $1300 area, only to back off quickly. The threat of a further escalation with North Korea and the possibility of military action kept buyers active, but for now the situation has quieted down a bit and the gold bulls are left looking for reasons to buy at current levels.

 

Key outside markets are also not doing gold any favors. The stock market has rebounded from a short bout of selling and is currently poised to challenge its recent highs. The market certainly appears ready to initiate another leg higher, and at this point it could take a significant event to undo stock investors’ optimism.

 

At the same time, bonds and notes have been on the decline as the Fed shows it’s ready to stick with its plan of two more rate hikes this year. Last Friday’s jobs data likely sealed the deal for another rate hike in June, as the U.S. added 211,000 jobs last month-well above consensus estimates of 185,000 jobs added. This report likely put to rest any concern after March’s disappointing labor market report.

 

The crude oil market is also adding to gold’s woes, as prices continue to decline and are now trading at the lowest levels in a year.

 

The combination of outside market activity, economic optimism and a lack of any fresh bullish catalyst could keep any upside in gold limited.

 

Over the weekend, the second round of the French presidential election was held, and favorite Emmanuel Macron became the next French President. This victory will likely cause a significant sigh of relief for the EU as well as the ECB and Swiss National Bank. A Marine LePen victory could have sent shockwaves through global financial markets, and could have even signaled the beginning of the end for the EU as at exists today.

 

With the French election over and done with, investors will get back to business as usual and the focus this week will again be on the economic data stream as well as any new legislative developments from the Trump administration.

For now, the path of least resistance in stocks and risk assets remains higher, and further upside in these assets may coincide with additional downside in gold. That being said, however, you have to question just how much stocks may have left in the tank without any new significant legislation being passed by the Trump administration.

 

The more time that passes without a tax reform deal being passed as well as a significant fiscal spending package being introduced, the more likely that a major reversal in stocks may be seen in the coming months. This, along with the current geopolitical environment, may keep the yellow metal from falling much further, and the market could see some very solid buying interest around the $1200 level. 

The Week Ahead In Gold

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As far as the gold market goes, the week ahead could be a busy one. The trading week will be packed with key economic data, the May FOMC meeting announcement, speaking engagements with various Fed officials and more.

 

This week could potentially turn the recent tide of weakness in gold, or it could put considerably more pressure on the yellow metal.

 

On Friday, markets got the latest reading on first quarter GDP which was well below consensus estimates of 1.1% with a reading of just .7%. Consumer spending was a significant drag, as it rose at a rate of just .3%, the worst reading since the fourth quarter of 2009. While the overall report could be considered mixed, the lack of growth in consumer spending could potentially be indicative of recession.

 

This weaker than expected GDP figure could make this week’s FOMC meeting a bit more interesting. Although markets are pricing in only a very small chance of a rate hike from the central bank this week, the Fed may offer some significant clues about its plans going forward and its overall assessment of economic activity.

 

Fed Funds futures contracts are still pointing to a very strong likelihood of a June rate hike from the central bank, although numerous issues could potentially put the Fed in a difficult position.

 

Friday’s poor GDP data may give the central bank a reason for pause, and could increase any concerns the Fed may have about extinguishing growth by being overly aggressive in its efforts to normalize monetary policy.

 

Not only does the Fed have to contend with the GDP figures and some other areas of economic weakness, but it may also weigh the current geopolitical landscape as well. In addition, if the Trump administration does not make more concrete progress on some of its key policy initiatives, investors may become nervous and the stock market could potentially begin to slide-a development that the central bank could also consider.

 

All in all, the Fed could very well find itself between a rock and a hard place as it considers rising price pressures with the possibility of slowing economic activity. Ongoing tensions with North Korea and Russia may only complicate matters further, and markets could be vulnerable to increasing volatility in the coming weeks and months.

 

What all of this could mean for gold remains to be determined. The yellow metal has been pulling back in recent trade, although its uptrend remains intact.

 

A more dovish tone from the Fed this week could send gold back to its recent highs or beyond, while a more hawkish tone could potentially fuel further downside pressure. The market may not fall far, however, given the current state of geopolitics and what appears to be increasing chances of military action against North Korea.

 

Investors and the gold market will also continue to pay attention to the French elections, with the next round of elections to take place on May 7th. This election, and other upcoming European elections have the potential to make or break the European Union as it exists today and could have far-reaching effects on global financial markets.