The Week Ahead In Gold

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There has been no shortage of news that could potentially have a significant impact on financial markets. Another rate hike from the Federal Reserve, the ongoing Supreme Court nominee saga and the global geopolitical landscape all have the potential to affect market action this week.

 

Last week, the U.S. Federal Reserve elected to hike interest rates again by an additional 25 basis points. The move from the central bank was not at all unsuspected and investors were likely far more concerned with the Fed’s outlook going forward. Although some changes were made to the central bank’s “dot-plot,” the Fed still sees another rate hike before the end of year and has penciled in another three rate hikes for next year.

 

The Fed’s commentary is always subject to interpretation, but some suggested that the past week’s comments did not reflect the type of hawkish tone that was anticipated. Of note were the central bank’s projections, which suggest economic growth will slow to sub-2% levels in the years ahead. This could be indicative of a fading away of recent stimulus measures including tax cuts and government spending.

 

In addition to the Fed, the ongoing state of U.S. politics could also start to weigh heavily on stocks and risk assets. The November midterm elections are quickly approaching, and the Trump administration is currently battling to get its Supreme Court nominee Brett Kavanaugh through the Senate and onto the highest court in the land. Numerous allegations of improper sexual behavior have forced the Senate to open another FBI background investigation into the nominee, and the week ahead is likely to be filled with increasing controversy and political discord.

 

Some have suggested that if the republicans are unable to confirm Kavanaugh to the Supreme Court, they will likely be looking at defeat in the midterm elections. If the democrats do take power, things could get very dicey as it would become extremely difficult for President Trump to continue to implement his agenda. Such a scenario could fuel a rapid spike in market volatility, and the stock market could take a very serious turn south.

 

In the meantime, the gold market seems to be content biding its time. The market has thus far shown little reaction to another hike from the Fed and the likelihood of another hike in the months ahead. Gold has continued to try to maintain price action at or near the $1200 per ounce level, and thus far the bears have been unable to force another significant leg lower.

 

The recent sideways action in gold could be the beginnings of the next great bull market. The longer the market trades sideways, the more explosive an eventual upside breakout could be. Such a move could be exacerbated by investors scrambling to put capital to work in alternative asset classes if or when stocks begin to really crack.

 

The long-term bullish fundamentals for gold, including weaker fiat currency values, geopolitical risks, recessions and overall risk aversion remain very much intact. Given these risks, it is likely only a matter of time before the yellow metal starts moving higher once again.

The Week Ahead In Gold

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The Dow Jones Industrial Average closed at a fresh record high on Friday, trading up to 26,743.50. The strong appetite for risk as well as a stronger dollar has been major factors in gold’s lack of luster. Despite numerous potential issues that could spoil the party for stock investors including an ongoing trade war and rising inflation; stock markets have remained the place to be for risk-hungry investors in search of yield.

 

A day or reckoning will come for global stock markets, however, it is very difficult to say when the levy may finally rupture. From a technical standpoint, fresh all-time highs in stocks are providing an all-clear signal to buyers and the market could see another fresh, significant move higher as markets enter a ‘melt-up” stage.

 

This week, the Federal Reserve will be having its regular policy meeting, with a decision on rates to be announced Wednesday. It is widely expected that the central bank will hike rates again by 25 bps. With another hike already baked into the cake, investors will likely be far more interested in whether the Fed will look to hike rates once more before the end of the year. As of now, it appears there is a very strong likelihood of one more 25 bps hike in November.

 

Despite the ongoing path of higher rates, the bigger picture begs the question of just how high rates may get in the current tightening cycle. Although the economy is strong and has essentially reached full employment, numerous potential roadblocks could keep the Fed from raising rates much further. Increasing chances of recession, the potential for a political shakeup in the U.S., an ongoing trade war and weakening stimulus effects could all influence the central bank’s policy decisions.

 

Although the gold market has had little to show in the way of upside in recent months, the selling pressure appears to be exhausted at this point. Another fresh leg lower cannot be ruled out, however, the market does appear to be in the process of building a longer-term base that may be constructive. The construction of a long-term base can be an extensive process, and investors should approach the market at this point with a long-term horizon in mind. The longer the market trades sideways the more explosive an upside breakout could eventually be.

 

The timing of the next economic downturn is the subject of much debate, with some analysts stating it could be years and others voicing strong opinions that the next recession will take hold in the next year or two. Given the age of the current economic expansion and bull market in equities and the likely wearing-off of the boost seen from tax cuts and government spending, the next downturn could be seen sooner rather than later. Add to this the potential for a major shakeup in U.S. politics as the midterm elections are quickly approaching and you could have a recipe for a major reversal in financial markets.

 

For the patient investor, the gold market may provide an excellent long-term value at or around current price levels. At some point, bullish fundamentals will once again fuel buying in this key asset class, and the market could enter a protracted bull market that could send prices to previous all-time highs or beyond.

The Week Ahead In Gold

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The gold market continues to consolidate around the $1200 level, and that may be a good thing. The market has remained under pressure for some time now, although recent price action could suggest that sellers have simply run out of ammo. At this point, the longer the market moves sideways the larger and more significant an eventual breakout may be and such a move would likely take place to the upside.

 

Investor appetite for risk is strong to start the week, with stocks moving higher in early Monday action. Markets have done a fantastic job of shrugging off many of the economic worries currently being seen, although just how much longer they will be able to do so is a critical question.

 

September is a historically tricky month for stocks, and this time around may prove to be no different. The equity markets are facing some significant headwinds, and with the U.S. mid-term elections rapidly approaching, things could get a lot dicier as volatility increases and as investors take some money off the table.

 

The Fed could play a major role in price action as well in the weeks ahead. It is widely expected that the central bank will hike its key interest rate again this month, and another move is still expected from the Fed before the end of the year. Although a December hike has come under increasing scrutiny, odds still look strong for the Fed to take further action. This has some analysts concerned, however, and some have even suggested that the central bank should keep rates at current levels.

 

Although higher rates could have an impact on stocks, possibly applying the brakes to higher prices, the bigger picture is a lot more concerning. Even with several more 25 basis point hikes, the Fed Funds rate would still be quite low. Given the low level of rates, the central bank may not have as many tools in the toolbox to effectively fight the next recession. It has been suggested that the next recession could be deeper and longer than the previous, and the Fed could essentially have its hands tied lacking the ability to lower rates enough to achieve the desired effect.

 

Such a scenario could potentially open the door to another round of QE, and some have even floated the idea of the Fed buying stocks or other premium assets. Whatever the case may be, the road ahead could certainly prove to be very bumpy, and complacent stock investors could bear the brunt of a rapid and significant decline in equity prices.

 

The dollar, which has without question played a key role in gold’s lack of upside, could also get hit hard. A major reversal in the currency could add fuel to the fire as investors seek out alternative asset classes and perceived safe havens.

 

It is impossible to say when-or if-such a scenario will unfold. There are numerous alarm bells already ringing loud, however, and it is up to investors to take heed. Given the current state of geopolitics and what are likely the late innings of the current economic expansion, the gold market could provide an excellent long-term value at current price levels and could see a protracted bull market get underway once the next recession takes hold.

The Week Ahead In Gold

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As traders and investors return from the last holiday weekend of the summer, market volatility could potentially begin to pick up in the weeks and months ahead. There is certainly no shortage of things for investors to worry about right now, with mid-term elections right around the corner in the U.S. and an ongoing trade war with China and others possibly escalating.

 

The gold market has climbed back above the psychologically $1200 level, however, it remains unclear if the recent rally will be sustainable. The market does have a number of short-term headwinds working against it, including higher stocks and a stronger dollar. Economic optimism and appetite for risk have also continued to be robust, further diluting the metal’s appeal as a safe haven.

 

How much higher stocks can go and how long before the next major recession are important questions that investors have to be asking currently. The current level of complacency in stocks is in and of itself a cause for concern, as such low levels of fear in the marketplace can make it increasingly vulnerable to a significant, domino-effect sell-off.

 

Speaking of stocks, the market has been showing some ominous warning signs lately that cannot be overlooked. Of particular note is recent action in stocks and the VIX. The CBOE’s volatility gauge, often referred to as the market’s “fear gauge,” has been moving higher in union with stocks. Although this does not necessarily indicate a market crash, it could potentially point to some underlying risk aversion ahead of some key issues such as the upcoming elections.

 

Another recent warning signal that has been discussed is the current valuation comparisons between stocks and real estate. Stocks have reached a level significantly above the median home price in the U.S., and some analysts have suggested that this could also spell trouble in the months ahead.

 

Stocks also appear to be highly correlated with the news cycle at this point, and Friday’s report of another $200 billion in tariffs by the U.S. on Chinese goods sent stocks into a tailspin.

 

Although stocks may be the next major driver of gold prices, the dollar has arguably been the biggest obstacle to higher gold over the last several months. The greenback has traded higher versus a basket of major currencies, and could potentially have more upside still in the tank. The notion of two more interest rate hikes this year, as well as accelerating inflationary pressures has provided the currency with some solid support. The dollar has backtracked a bit in recent trade, however, and is vulnerable to some key issues. The Fed could take a more dovish stance this year or next, and could be in no hurry to hike rates much further. With the mid-term elections coming up as well, a change of power in the House or Senate could also have a major impact on the dollar and global currency markets.

 

With so many potential wildcards, long-term investors appear to be getting increasingly interested in gold at or around current levels. Whether or not a long-term bottom has been reached remains unclear at this point, however, the recent slowdown in the selling could be indicative of larger bargain hunters stepping in to the market at current levels. Although any further declines cannot be ruled out, such declines would likely be met with significant buying interest and prices may not fall much further than recent lows.