The Week Ahead In Gold

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The question of whether the Trump administration would in fact be able to make good on a key campaign promise regarding tax reform has been answered. The President has signed the new tax bill into law, and with it comes a host of changes to the U.S. tax code.

 

The legislation has faced numerous hurdles, and opinion of the bill is widely split along party lines.  Democrats seem to be of the opinion that the bill really only benefits the top earners, while republicans seem to think the bill will benefit nearly all taxpayers. The slashing of the corporate tax rate down to 21% from 35% could potentially make big waves for the economy, although it remains unclear just how much of a ripple it may produce.

 

Some companies have already announced bonuses to be paid out to employees following the passage of the tax bill. Other companies have also raised their minimum wages. It will likely take some time before any real trickle-down effects are seen. But that is the hope: that corporations keeping more money will use those tax savings on growth, investment and higher wages-all major economic drivers.

 

Now that the tax legislation has become law, investors will once again turn their attention elsewhere. The current geopolitical climate, the cryptocurrency craze, higher stocks and the notion of rising rates will all be considered by investors as the year draws to a close. In fact, the last few trading sessions of the year will likely feature slowing volumes, and could see some heightened volatility based on a lack of any significant volume.

 

The gold market has been moving higher once again, as the bears have not been able to capitalize on any recent weakness. The market has stood its ground quite well in fact, which would seemingly be indicative of underlying strength. The question is: does the market have enough of a tailwind to penetrate recent highs and make a sustainable move higher. Perhaps that question will be in answered in the first quarter of 2018.

 

Heading into the New Year, the aging stock bull market continues on while the geopolitical scene remains extremely challenging.  There is also, of course, the Fed and whether or not it decides to stick with its plans for another three rate hikes in 2018. Investors will no doubt have plenty of issues to chew on as 2017 comes to an end.

 

Gold investors seem content biding their time until the next shoe drops. The next major bullish catalyst for gold could come in several different forms, from a stock market collapse to an escalation with North Korea to signs of recession. Whatever the case may be, the market could be close to a substantial breakout. With the potential for a stock market reversal or even collapse, geopolitical tensions that rival those of the Cold War and other economic issues, such a breakout in gold would arguably be on the upside. If such a move does occur, the market could be off to the races, and could not only challenge but possibly exceed previous all-time highs in a short period of time. 

 

The Week Ahead In Gold

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All eyes will be on Washington D.C. this week, as the Trump administration gets ready to have a major piece of tax legislation passed. The highly touted tax reform bill would cut tax rates and lower the corporate tax rate from 35 percent to 21 percent. A major decrease in the rate paid by corporations could potentially spur further economic growth and investment, and investors appear to be confident at this point that the proposed legislation will become law.

 

The increasing optimism over the economy has been reflected in higher stock prices and ongoing willingness on the part of investors to add to long equity positions despite the aging bull market. The market does not seem to have reached a level of exuberance yet, however, that could be indicative of a top. Although numerous analysts have made calls for the market being at or near its highs for this bull market, stocks have been very resilient and so far have not shown any significant signs of reversing course. Other analysts have taken the other side of the trade, calling for stocks to continue moving higher-even substantially higher-from current levels.

 

Whatever the case may be, the path of least resistance in stocks remains higher until proven otherwise. Should equities continue their seemingly endless march higher, gold and other perceived safe haven asset classes may have a difficult time gaining any real traction. That being said, gold investors appear quite content scooping up the metal on any significant dips. In addition, while the market did see a bit of a washout recently, that selling did not do any significant chart damage. On the contrary, that sell-off could possibly indicate a bottom has been reached.

 

Although gold has a number of bullish, long-term factors working in its favor, it is also contending with a number of short-term influences that have kept a lid on prices. Higher stocks, strong risk appetite and the notion of higher rates have all weighed on the metal in the short-term. Long-term investors appear quite content buying fold in its current range, however, and the lack of any significant moves lower would seemingly indicate a strong degree of market equilibrium.

 

Whether it’s today, next week, next month or next year, that equilibrium will change at some point. And when it does the case is very strong for substantially higher prices. Any number of issues could act as the catalyst for a major upside breakout, including a stock market crash or reversal, ongoing dollar weakness, a cryptocurrency crash, recession or geopolitical factors. The fact is that this is a great example of where the patient, long-term investor could be handsomely rewarded.

 

In the near-term, gold will likely take its cues from stocks, the Fed and any fresh geopolitical news. As the holidays approach, trading volumes will likely decrease significantly, which can also fuel a high degree of market volatility. In addition, year-end selling or position squaring may also be a factor for markets in the weeks ahead going into the New Year. 

Gold, Bitcoin, or Both

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The precious metals space has been challenged with a new asset class whose popularity, like its price, continues to gain momentum. Of course, we’re talking about cryptocurrencies. The fact that we continue to see cryptocurrencies gain both widespread appeal and price gains have dumbfounded many commentators who struggle to apply any traditional metrics of valuation or rationale to their price. As the hysteria rages on and the initial outlier investment attracts new participants by the day, its worth discussing the misconceived link of bitcoin or other cryptocurrencies taking over the haven appeal of precious metals.

 

The link to gold and other precious metals is a weak one, and for one reason. Simply, gold prices in US dollars are behaving as expected at present time. The same can not be said for cryptocurrencies. As many in the media or proponents of the new investment space have tried to portray that cryptos like bitcoin are taking the place of gold, they are missing a key distinction. Gold and precious metals are assets whose prices are predominantly driven by the sentiment and comfort level of the stability of the global economy and certain financial markets. It also historically exhibits an inverse relationship to the worlds reserve currency. The US dollar index is down 8.1% year to date, and gold is up 9.5%.

 

As we end 2017 and we begin to receive outlook and commentary for 2018, there seems to be a common place theme. A coordinated global economy will continue to gain momentum in 2018. This will lead western central banks to continue to raise interest rates. The US Federal Reserve just this past week anticipates three rate hikes in 2018, and at this point in the economic cycle raising rates in coordination with stronger growth, its not anticipated to hinder the economy just yet and is not anticipated nor stunt the equity markets. Add into the mix an expected US corporate tax cut, and we have an environment supportive of the worlds reserve currency, the US dollar. Unfortunately, that scenario doesn’t scream higher gold prices.

 

Alternatively, the only thing driving the price of cryptocurrencies currently is an onslaught of demand fueled by individuals looking for a quick return. Furthermore, this isn’t an attack on the idea of digital currencies and the role or potential they could play in a fast evolving and technology driven global economy, but the price stability and role as a safe harbour for capital is misguided and misrepresented. For a currency to evolve or for utility to be created from this popularized asset, it must exhibit some stability, which it has failed to do. Additionally, an asset that appreciates this quickly purely on increased demand is vulnerable to the same move to the downside.

 

We are not calling for an end to the rally in cryptocurrencies, or even suggesting that those who have participated in it are ill-informed. Its commendable to the numerous initial investors that were in front of this trend and profited massively from being ahead of the curve. That said, an asset that appreciate 17 times year to date in Canadian dollars, and that figure will be different depending on when this is read, highlights more of a craze driven rally than safe-haven.  To circle back to precious metals, in these exuberant equity markets an uncorrelated proven safe-haven like gold continues to serve a key role in any diversified portfolio. But to the question of gold or bitcoin, that’s up to the investor, but there’s no reason its one or the other given they’re distinctly different in nature.

 

The Week Ahead In Gold

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The gold market has remained on the defensive in recent trade, as a combination of factors and a lack of any fresh, bullish catalysts weighs on prices. Higher stock markets, potential tax reforms and overall robust risk appetite have all played a part in gold’s recent lack of upside, and may continue to do so for the time being in the absence of any fresh news.

 

Investors are looking ahead to the highly anticipated Federal Reserve meeting this week, at which the central bank is widely expected to hike interest rates by another 25 basis points. This would bring the key rate to 1.25-1.50% as the Fed continues to look ahead at normalizing monetary policy. Although a rate hike appears to be completely “baked into the cake,” investors will likely be far more concerned with the Fed’s commentary following the announcement on policy.

 

The central bank will likely offer some discussion on not only the potential path of rates going forward, but its assessment of economic conditions as well.  Some of the key issues that the central bank may address include the inflation picture and tax stimulus. There has already been some discussion about the Fed becoming more aggressive regarding monetary policy if tax stimulus is in fact passed, and markets will be very interested in any type of guidance it chooses to provide. The ongoing lack of inflation may also be a focal point, although prices have recently shown some signs of picking up.

 

The gold market has a tendency to come under pressure heading into a rate increase, but then often rebounds significantly once the decision has been made official. This time around may be no different.

 

Stocks have thus far not demonstrated any significant signs of a collapse or reversal, and appear poised for further upside. The ongoing ascent by equities is likely having a substantial effect on gold, and the yellow metal may not be able to mount any sustainable rallies until stocks appear to have topped.

 

Also potentially having a negative impact on gold right now is the hype surrounding Bitcoin. Various exchanges have now launched futures contracts on the cryptocurrency, and prices could potentially go higher-much higher-before possibly crashing back down to earth. The current state of euphoria regarding that market has is yet another clue about a possible bubble, and that bubble may end badly for a lot of uninformed investors.

 

On the plus side for the metal, the geopolitical landscape remains complicated, to say the least. The recent decision by the Trump administration to move the U.S. embassy to Jerusalem has enraged many in the Middle East, and protests are ongoing.

 

And of course, North Korea remains a very critical issue that must be dealt with.

 

Against this backdrop, gold is not likely to fall too far in price. In fact, recent declines in the metal could potentially represent an excellent long-term buying opportunity for the patient investor. The run higher in stocks will eventually fizzle, and Bitcoin may prove to be nothing more than the next big bubble. Once some of these market dynamics begin to change, the yellow metal will have its chance to shine once again, and that may come sooner rather than later. 

The Week Ahead In Gold

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The gold market will have plenty to consider as the new trading week gets under way. The U.S. Senate has passed its version of a tax overhaul, paving the way for republicans to implement significant corporate tax cuts and other changes. Now, the Senate and the House of Representatives will have to iron out any differences between their plans before the new code can become law. Despite this, the Senate vote is another major step in the right direction for the Trump administration as it tries to make good on a key campaign promise.

 

Speaking of the Trump administration, on Friday General Michael Flynn, a former Trump campaign adviser, pleaded guilty to lying to the FBI. The latest indictment by special counsel Robert Mueller and his team could potentially have a significant impact on the course of the investigation going forward. It is widely thought that Flynn may have damaging testimony on other key players in the campaign, including other members of Trump’s inner circle.

 

News of the guilty plea sent gold moving sharply higher, and fueled some selling pressure in stocks. That initial knee-jerk reaction could fade as the new trading week gets under way. On the other hand, any new indications of potentially damaging evidence against the campaign could fuel further selling in stocks and risk assets while giving a boost to gold and other perceived safe haven assets.

 

Outside of the geopolitical sphere, stocks and the dollar could dictate price action in the gold market this week. The dollar index has been trending lower, and could potentially be on the verge of a major downside breakout. The dollar will likely be driven by further developments regarding the tax overhaul, and if a deal seems likely the dollar may regain some lost ground. On the other hand, if a tax deal begins to hit some significant snags, it could add further selling pressure to the greenback, adding to an already weak technical backdrop. A break below the lows seen in September could trigger a more aggressive move lower in the currency, and could act as an important catalyst for any upside breakout in gold.

 

Stocks have thus far remained very resilient, and may continue their winning ways in the absence of any fresh, bearish news. Tax overhaul deliberations could play a major role in stock market in the weeks ahead as well. Anticipation of a deal could keep the bull market going, while some analysts believe that lack of a deal being reached could potentially act as the last straw for the equities market.

 

The gold market remains stuck in its recent trading range, but as more bullish geopolitical and economic factors add up, the market could be gearing up for a significant move higher. The market is trading near key levels once again, and if buyers absorb any downside attempts at current levels it could be indicative of underlying market strength.

 

The next few weeks going into the end of the year could see muted price action across asset classes in the absence of any fresh, major news. News has not been difficult to come by, however, and with each trading day comes the possibility of a major market shakeup given the current geopolitical climate along with ongoing domestic issues being seen in the U.S.