The Week Ahead In Gold

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Markets have been on the move in recent weeks, and volatility could see some expansion in the weeks and months ahead. There has been very little, if anything, to stand in the way of higher stocks. Markets remain strong, and fresh all-time highs will likely be seen again before things eventually turn south.

 

Stocks have done a good job, thus far, of focusing on the positives while essentially sweeping any negatives under the rug. This trend will not go on forever, however, and in fact could be getting very close to a conclusion. Numerous issues could potentially put the brakes on the ongoing rally in equities, and when the selling finally starts it has the potential to accelerate quickly. In fact, a decline in stocks of 20, 30 even 40 percent or more cannot be ruled out.

 

One potential clue that such an inflection point may be on the horizon is the notion that stocks have finally entered the “FOMO,” or the Fear Of Missing Out phase. Investors that have stood on the sidelines, waiting for the “big correction” that never came, are finally unable to tolerate the market moving any higher without them. These investors are now jumping into stocks, and recent inflows suggest that there is significant cash that could still be put to work in equities.

 

This could be the beginning of the end…

 

Stocks could now potentially see a strong “melt up” as all of this remaining investment capital finds its way into the market. Another double-digit percentage run higher could be seen in equities before the bottom finally falls out. Markets have a tendency to inflict as much pain on as many people as possible, and it’s usually once every last investor has gotten long.

 

Not only has the market seemingly entered what could be the final phase of the current bull market, but numerous outside influences could also play a role in a major reversal in stocks and risk assets. The geopolitical landscape remains a potential powder keg. The recent U.S. tax cuts may not have the anticipated effect on the economy. The U.S. Federal Reserve could get more aggressive with monetary policy. Credit is tightening. The list of potentially bearish issues cannot be disregarded indefinitely, and at some point they could weigh heavily on equities.

 

Some investors seem to have seen the writing on the all and are paying attention. The potential for a major shift in market dynamics, including a possible reversal or even collapse in equities along with a weaker dollar, has likely played a major role in gold’s recent upside. This trend may not only continue, but could quickly pick up speed if there is a sudden and severe increase in stock market volatility.

 

Recent price action suggests that stocks could be nearing the end of the current bull market just as gold gets ready to embark on what could be an extensive run higher. The warning signs are there in plain view. It’s up to you whether or not to heed the warning.

The Week Ahead In Gold

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The gold market has a number of things going for it currently that could make recent upside more sustainable. The potential for rising inflation, a weaker dollar and ongoing geopolitical tensions are just a few of the issues that could keep the gold market on the offensive.

 

The shutdown of the U.S. Government on Saturday could also have a significant impact on prices this week. Although many seemed to believe that it wouldn’t come to this, U.S. lawmakers were unable to come to an agreement to keep the government funded beyond Saturday. The shutdown affects numerous areas of government, although several key responsibilities such as military readiness and air traffic control will be maintained.

 

The U.S. Government was last shutdown five years ago, and it took two weeks for a funding deal to be reached. During that time, thousands of federal workers were furloughed, and many government services ground to a halt once they ran out of operating cash.

 

The inability of Republicans and Democrats to make a deal will likely add to already-increasing anxieties over the willingness of both parties to work together on key issues. Both sides have stood their ground thus far over the weekend, and it appears that a deal may not be seen anytime soon.

 

The potential for a shutdown took the dollar lower last week, with many traders apparently looking to put on a “just in case” trade.

 

The potential effects of an ongoing shutdown could be significant for the greenback, which remains near three year lows. The dollar has been trending lower in recent months, and could potentially see another sharp decline below longer-term support. Further dollar weakness could keep gold buyers very motivated, and the metal may also benefit from an increasing flight to safety mentality.

 

This week could be an interesting one, with rising market volatility and increasing levels of investor uncertainty. Oddly enough, stocks finished the Friday session sharply higher, although that may have been due to optimism over a deal being reached to avert the shutdown. This week could see a very different attitude towards equities and risk assets, and investors will be looking for progress in the funding negotiations. Without it, a risk-off scenario could lead to a stock market sell-off, with investors seeking alternatives or even parking cash on the sidelines.

 

The shutdown will also delay the release of key pieces of U.S. economic data, effectively leaving investors in the dark. Although the economic effects of the shutdown may be relatively muted, the longer it continues the more serious those effects could potentially be.

 

Gold did see an end to its five-week winning streak last week, but this may actually be healthy for the market. Prices had seen some rapid acceleration to the upside, and a little back-and-fill-price action could set the stage for another surge higher. Ongoing U.S. political issues along with rising inflation are likely to keep the market on firm footing. That being said, investors will likely step in to buy any significant dips unless proven otherwise. 

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The Week Ahead In Gold

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As the 2018 trading year gets into full swing, many markets are simply picking up where they left off the prior year. Stocks, in particular, continue to climb and seemingly rise each day with little effort. In fact, the stock bull market is a decade old at this point, and you have to wonder if the ease with which the market keeps ascending should be a cause for concern.

 

Stock market volatility remains stubbornly low, and investors may very well be feeling overly confident at this point. Although the market may not have yet reached a full-on state of euphoria, it could be getting close. Further gains in stocks may attract anyone left waiting on the sidelines for a significant pullback, as the pain of missing out on the rally becomes  too much to take. Once that point is reached (and it could be sooner rather than later), stocks could become extremely vulnerable to what could potentially be one of the greatest crashes of all time.

 

Recent strength in gold and silver would seemingly indicate that at least some investors are recognizing these risks, and are looking to take proactive steps in adding portfolio diversification for changing market dynamics that could be seen in the year ahead.

 

Of particular note is the fact that gold has, thus far, remained on the offensive in spite of rising treasury yields. A Federal Reserve official even suggested recently that the central bank may have to take more aggressive action to slow things down. New York Fed President William Dudley was quoted in an article from Marketwatch.com this past week, saying the Fed may have to “press harder on the brakes” in the next few years, potentially increasing the risk of a hard landing.

 

Mr. Dudley also discussed the recent tax legislation that was passed in the U.S., and was quoted as saying “While this does not seem to be a great concern to market participants today, the current fiscal path is unsustainable.” He added that projections from the Congressional Budget Office see debt servicing costs more than doubling by 2027.

 

Mr. Dudley’s comments highlight two major issues that could be a significant driver of higher gold in the years ahead, and the issue of exploding deficits and rising debt is likely to gain considerably more attention in 2018 and the years ahead.

 

The dollar has been moving lower, and the debt issue is without question a major driver of dollar weakness. The greenback is poised for further downside, and gold may potentially benefit from the weaker currency. Consumers may even begin to feel the pinch from a weaker currency, as purchasing power takes a hit and everyday goods and services become relatively more expensive. This may also boost interest in hard assets like gold, which may potentially offer a meaningful hedge against declining paper money values.

 

The potential for a stock market collapse or reversal, and rising debt are two of the major themes that could fuel a significant rally in gold and other hard assets. Both of these themes could be characterized as being unsustainable, and could lead to widespread market volatility and risk aversion. 

 

The Week Ahead In Gold

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The gold market got out of the gate with a nice head of steam to kick off 2018, and the market is showing some significant signs of strength. Gold may, however, be slightly overbought in the near-term, and a pullback is a possibility before the recent trend higher resumes.

 

Investors have been flocking to gold as the New Year gets under way, and that has been seen not only in the physical market but in other markets as well. The world’s largest gold-backed ETF, known as SPDR GLD, recently had quite the winning streak. In fact, GLD rose 11 consecutive days before the winning streak was finally snapped with declines last Wednesday. This represents the longest win streak for the ETF in its history, and more gains could potentially be on the horizon.

 

While we believe that the only real way to harness the power of gold is to buy and hold the physical metal, the strong start for GLD could point to more upside ahead for the yellow metal.

 

As 2018 gets under way, investors seem to be growing increasingly concerned with a number of potential issues that could warrant diversification with gold and a more cautious approach to investing. While this list is by no means complete, some of the major areas of concern for investors in the months ahead may include:

 

  • The potential for rising inflation
  • The North Korean conflict
  • Domestic politics in the U.S.
  • Exploding U.S. deficits
  • The potential for the end of the bull market in stocks
  • A weaker dollar

 

These and other issues have been largely shrugged off by investors for quite some time, but how much longer they can simply be “swept under the rug” is a significant question.

 

Market volatility has been essentially non-existent for a very long time now, and stocks have not seen a major pullback in years. Could 2018 be the year that volatility rears its ugly head once again? Quite possibly, and it seems that many forward-thinking investors are taking steps now to try to insulate their portfolios from a return to more historical levels of volatility.

 

A large spike in selling and volatility could arise from a variety of possible catalysts. Just look at how the markets behaved when Michael Flynn pled guilty in the Robert Mueller investigation or how they have reacted, at times, to further missile tests by North Korea.

 

Whatever the primary driver may be, a major sell-off could potentially have a domino effect, and investors could go running for the exit signs in droves. This could be accompanied by a substantial increase in the VIX or other measures of market volatility, and stocks could see a large portion of gains made in recent years wiped out in a hurry. As the old saying goes: “Markets like to take the stairs up and the elevator down.”

 

Equities seemingly become more and more vulnerable by the day, and it may not take much to set a significant sell-off or market reversal in motion.  Given the rising geopolitical and stock market risks, the gold market, however, may simply be at the beginning stages of a multi-year protracted bull market that could see prices challenge or exceed previous all-time highs. 

An Outside-of-the-box Forecast

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There is the opportunity for be two competing themes for the Canadian economy into 2018. The first, and perhaps favored is that a strong US economy will benefit a slightly lagging Canadian economy in the year ahead. Moderating economic growth in Canada follows a year of robust, G7 leading performance. Further, interest rate hikes south of the border will be witnessed in accordance with a robust domestic US economy benefiting from one of the largest corporate tax rate cuts since the Reagan administration.

 

Alternatively, the Canadian economy will advance on its own merits once again with the best job growth since 2002, and the lowest jobless rate since 1976, which will see the momentum ending 2017 carry forward into the new year. For the Canadian-US dollar exchange rate, it seems that the first half of this year could prompt a range bound tug of war for whichever economy is outperforming the other.

 

Since the 19th of December, the Canadian dollar has advanced over 3 per cent. Commodities quietly seem to be a significant part of the story. Since 2014 and a bear market in commodity prices led by a downturn in crude oil markets, the story has been one of abundances. Stockpiles of raw materials and surpluses of oil in storage buffered any demand shocks. As US oil inventories sit 20 per cent below their March high, one analyst commented this week following the protests and unrest in Iran that geopolitics haven’t impacted the oil markets in a sustained manner over the past three years, and that tide could begin to change.

 

Like Canada and other G7 nations including Europe and Japan, China and other emerging market economies saw a significant rebound in 2017. As a result, the MSCI Emerging Markets Currency Index is at its highest level since May of 2013 because of a strengthening backdrop in Asia. As the global economy is on track for its strongest year since 2011, the picture of a renewed manufacturing boom portrayed by positive economic surveys and increased demand for raw materials is another positive supportive for the loonie.

 

To revert to the consensus forecast, we will likely see the US economy as the leader in 2018. The question, however, is one of a transitory boost to economic growth versus the notion of sustainability. The corporate tax rate reduction to 21 per cent will be supportive for corporate earnings in the US and specifically more so for companies with greater exposure to the domestic economy. The sustainability question though is raised over whether congress will go into deficit control and the forthcoming debate over entitlement programs, which will likely shape the conversation around midterm elections in November.

 

Hence, we have a tug of war. Already forecasts for the Bank of Canada’s first interest rate hike is moving forward in 2018. The Fed is then due to up US rates in March. But the rationale for rate hikes could be the surprise in 2018. Instead of lifting rates with a strengthening global economy, and fitting with the commodity story are inflationary pressures, at which point interest rate hikes from central banks remain necessary, but risk becoming restrictive to economic growth.

 

As the New Year provides an opportunity to regroup and hypothesize themes for what’s ahead, certainty and complacency fit with a status quo risk-on investment environment. If something outside-of-the-box was to disrupt that, central bankers going on the offensive (increasing interest rates ahead of inflation) could be just that for 2018.

The Week Ahead In Gold

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The gold market is kicking off 2018 with a bang, as the market seeks to move further away from previous resistance. The dollar index continues to slump in early trade, and has pushed the gold market to a multi-month high. Although there are a variety of issues that could affect gold prices in the New Year, a weaker dollar is likely to be a theme that is revisited often.

 

As the New Year gets under way, investors may start moving some capital around as they look to rebalance. Given the current geopolitical backdrop and significant stock market risk, gold and other perceived safe haven assets could potentially see substantial inflows, and the recent rally in gold could continue.

 

The dollar index had a very poor showing in 2017, declining by some 10 percent. This was the largest yearly loss since 2003, and the first losing year since 2012. The notion of higher rates and tax reforms has not provided an anticipated boost to the currency, and it may remain on the defensive as worries over the deficit increase and as other key currencies move away from ultra-accommodative monetary policies. The dollar index is on shaky ground from a technical perspective as well, and is in danger of seeing another substantial drop based on chart selling.

 

Although the dollar could be a major driver of gold in the New Year, investors may also pay very close attention to the stock market.

 

Whether or not 2018 is the year the stock market rally finally comes to an end remains unclear, although the possibility is definitely worth considering. Stocks have been moving higher for a decade now, to the tune of a couple hundred percent. That rally, however, has been built on a house of cards of ultra-low interest rates and quantitative easing. The Fed has already done away with QE (at least for now) and is now in the process of attempting to normalize monetary policy. The central bank has penciled in three rate hikes this year, and seems to be building a case for higher rates in general.

 

The Fed has spoken of more aggressive policy before, however, and elected to sit tight. If the central bank does take a stronger approach, however, it could have dramatic effects on the stock market. In fact, rising rates could eventually be the final straw for the stock rally. Higher rates would make other asset classes, such as bonds and notes, more competitive and could fuel a decline in corporate profits as borrowing becomes more expensive. The market could finally see a good, old-fashioned correction-or worse-a major sell-off followed by a lengthy bear market.

 

These risks may keep the Fed walking on eggshells, and the central bank is likely to stay on a cautious and gradual path towards higher rates.

 

Picking up where 2017 left off, the New Year is also likely to be full of geopolitical issues that could have sweeping effects on global financial markets. The U.S. and Canada have multiple challenges to grapple with, with the North Korean nuclear threat being at the top of the list. Ongoing geopolitical conflicts may also keep a floor under gold prices, and could underpin a significant rally in the metal should tensions escalate further.

 

The gold market has a number of tailwinds currently, and recent activity would suggest that prices could be headed significantly higher. In fact, 2018 could be the beginning of a protracted bull market in gold that could see a challenge of previous all-time highs or beyond.

The Week Ahead In Gold

/0 Comments/in , /by

The gold market is kicking off 2018 with a bang, as the market seeks to move further away from previous resistance. The dollar index continues to slump in early trade, and has pushed the gold market to a multi-month high. Although there are a variety of issues that could affect gold prices in the New Year, a weaker dollar is likely to be a theme that is revisited often.

 

As the New Year gets under way, investors may start moving some capital around as they look to rebalance. Given the current geopolitical backdrop and significant stock market risk, gold and other perceived safe haven assets could potentially see substantial inflows, and the recent rally in gold could continue.

 

The dollar index had a very poor showing in 2017, declining by some 10 percent. This was the largest yearly loss since 2003, and the first losing year since 2012. The notion of higher rates and tax reforms has not provided an anticipated boost to the currency, and it may remain on the defensive as worries over the deficit increase and as other key currencies move away from ultra-accommodative monetary policies. The dollar index is on shaky ground from a technical perspective as well, and is in danger of seeing another substantial drop based on chart selling.

 

Although the dollar could be a major driver of gold in the New Year, investors may also pay very close attention to the stock market.

 

Whether or not 2018 is the year the stock market rally finally comes to an end remains unclear, although the possibility is definitely worth considering. Stocks have been moving higher for a decade now, to the tune of a couple hundred percent. That rally, however, has been built on a house of cards of ultra-low interest rates and quantitative easing. The Fed has already done away with QE (at least for now) and is now in the process of attempting to normalize monetary policy. The central bank has penciled in three rate hikes this year, and seems to be building a case for higher rates in general.

 

The Fed has spoken of more aggressive policy before, however, and elected to sit tight. If the central bank does take a stronger approach, however, it could have dramatic effects on the stock market. In fact, rising rates could eventually be the final straw for the stock rally. Higher rates would make other asset classes, such as bonds and notes, more competitive and could fuel a decline in corporate profits as borrowing becomes more expensive. The market could finally see a good, old-fashioned correction-or worse-a major sell-off followed by a lengthy bear market.

 

These risks may keep the Fed walking on eggshells, and the central bank is likely to stay on a cautious and gradual path towards higher rates.

 

Picking up where 2017 left off, the New Year is also likely to be full of geopolitical issues that could have sweeping effects on global financial markets. The U.S. and Canada have multiple challenges to grapple with, with the North Korean nuclear threat being at the top of the list. Ongoing geopolitical conflicts may also keep a floor under gold prices, and could underpin a significant rally in the metal should tensions escalate further.

 

The gold market has a number of tailwinds currently, and recent activity would suggest that prices could be headed significantly higher. In fact, 2018 could be the beginning of a protracted bull market in gold that could see a challenge of previous all-time highs or beyond.