The Week Ahead In Gold

/in , /by

The gold bulls may have their work cut out for them this week as fading risk aversion pressures the market. It has been widely reported that the U.S. and China are nearing an agreement on trade to put an end to the tariff war that has been going on for months. The effects of the trade war have already been seen in both countries and a resolution has the potential to fuel a significant rally in stocks.

 

Although there are numerous details that still need to be worked out, it has been reported that China may commit to purchasing large amounts of U.S. agricultural and energy products while also removing barriers making it easier for U.S. companies to operate in China. The U.S. for its part, is reportedly looking at removing tariffs on $200 billion in Chinese imports. It has been suggested that a formal agreement could be reached by the end of the month.

 

A U.S./China trade pact could be viewed as a major victory for U.S. President Donald Trump. The Trump administration has made the restoration of a fair and equitable global trade marketplace a cornerstone of its policy agenda, and a deal could come at a great time for the administration. Trump recently left Vietnam empty-handed following an unproductive meeting with North Korean leader Kim Jong-Un. The Trump administration is also dealing with numerous legal and investigative issues including last week’s testimony from former Trump attorney Michael Cohen.

 

In addition to higher equities, the gold market may also have to contend with a stronger dollar. The greenback is moving higher today on trade optimism and could potentially see further upside later in the week as the ECB meeting gets underway. The Eurozone continues to grapple with a weak economy and could potentially cut its economic forecast while also signaling to markets that an initial rate hike may be further down the road than previously anticipated.

 

Despite some of the current headwinds, however, the gold market still has a lot of fundamentals working in its favor. A poor European economic outlook, an ongoing slowdown in the U.S. and China and the end of U.S. monetary policy-tightening could keep the yellow metal on an upwards trajectory.

 

The larger picture is also bullish for gold. The aging equity bull market will, at some point, conclude and investors will be forced to seek out alternatives. The U.S. debt load also recently hit over $22 trillion, and the government has again reached its credit limit. Although lawmakers could vote to raise the debt ceiling, yet again, there continues to be no concrete plans in place for how the massive debt load will be addressed. In fact, the threat of additional government shutdowns is likely to become a major area of focus as the fiscal situation deteriorates further. While it may not take place this year, next year or even in the years ahead, the U.S. will eventually be forced to deal with its massive debt burden. Although it remains unclear how the government might address the issue, it could have significant ramifications for the dollar and a significant currency debasement cannot be ruled out as a possible solution.

 

Although the 3.5-month uptrend in gold has now been negated, the metal is not likely to fall too far before finding significant buying interest. For the patient, big-picture investor, the current dip may represent an excellent long-term value.

The Week Ahead In Gold

/in , /by

The last several weeks have seen some very encouraging signs for the bulls, and Friday’s session was no exception. Spot gold moved higher by nearly $9.00/oz despite some factors that would typically act as significant headwinds.

 

The dollar index was stronger on Friday to end the week. Although the currency wasn’t up a huge amount in percentage terms, the rally in gold even as the dollar rose was a breath of fresh air for the bulls. Many of the gold market’s largest net percentage gains or declines in recent months have been the direct result of large moves in the greenback.

 

Stocks were also higher Friday to cap off the week, and equities went out in dramatic fashion. The benchmark Dow Jones Industrial Average rose by nearly 444 points while the broad-market S&P 500 saw a gain of nearly 30 points. Equities saw strong buying interest as appetite for risk increased. Indications are that ongoing U.S./China talks over trade that took place last week in Beijing were productive and negotiators have now laid out a framework for further talks.

 

The price action seen in gold and other outside markets to end the week may be considered quite bullish for gold. The metal typically does not see significant strength in the face of a stronger dollar or sharply higher equity prices. Not only that, but the fact that gold was sharply higher despite strong investor appetite for risk may also be very telling.

 

The gold market is showing some undeniable signs of strength and is being bid higher with or without supportive outside markets. This can only mean one thing: that higher prices are likely ahead as demand strengthens. The recent strength in gold and current uptrend that has been in place for some time now may simply be further indication of an unfolding bull market.

 

The gold market could still face some obstacles in the weeks and months ahead. Stocks could continue to work higher again; the dollar could strengthen further, and investors may become increasingly comfortable taking on risk. These hurdles would likely prove transitory, however, as numerous key market fundamentals paint a very different picture.

 

The global economy is slowing, and even with a deal on trade, both the U.S. and China (the world’s first and second-largest economies) could see a very bumpy road ahead. As the next major recession approaches and takes hold, the U.S. and other nations may lack the tools necessary to effectively and swiftly combat the slowdown. Interest rates are still well-below pre-financial crisis levels, and many central bank balance sheets remain overinflated with previous asset purchases.

 

In short, global central banks could potentially be forced to resort to even riskier and untested measures to fight the next depression. This could not only lead to lower equity and asset prices but could put a significant dent in currency values. Such a scenario has the potential to be extremely bullish for gold and hard assets, and prices could rise substantially from recent levels.

 

The next several months will provide some important clues about the state of the global economy. If further weakness is seen in the data stream or if stocks again turn decidedly lower, central banks could be forced into action. Some may argue that such a scenario is not only likely, but inevitable. This idea may keep gold on the offensive in the weeks and months ahead as an increasing amount of “smart money” looks diversify in alternative asset classes and avoid the next major collapse in equities.

The Week Ahead In Gold

/in , , /by

After a brief period of consolidation, the gold market could potentially be headed higher in the weeks ahead. This week; markets will remain focused on U.S. macro data as well as the potential for another U.S. Government shutdown.

 

There are numerous wildcards that could drive price action in the week ahead. The deadline for a deal on Trump’s proposed wall along the country’s southern border is February 15th. If a deal to fund the wall is not reached, Trump appears ready and more than willing to shut down the government again. This scenario could potentially send gold prices higher as it did in late December when the government was closed for business.

 

Any shutdown-based rally may prove transitory in nature, however, as shutdowns have historically not had much of a long-term impact on gold prices.

 

Markets will also keep an eye on any commentary from the Fed. `Although there is no FOMC meeting this week, there are several Fed officials speaking at various engagements. After making a large swing from the hawkish to the dovish side of the ledger in recent weeks, the Fed is now faced with an interesting dilemma: How to balance a strong labor market and resilient U.S. economy against the backdrop of weakening global growth. The Fed is also likely to take the stock sell-off that marked a weak end to 2018 into account and may look to rock the boat as little as possible. Dovish expectations have possibly been overblown at this point, however, and at least one rate hike from the central bank this year cannot be ruled out.

 

The ongoing U.S./China trade negotiations appear to have hit a snag, and the deadline for a deal by March 1st is quickly approaching. A U.S. delegation will be in Beijing to continue previous talks, but as of right now it does not appear that President Trump and Chinese Leader Xi Jinping will be meeting any time soon. If significant progress is not seen in the weeks ahead, the agreed upon deadline will likely come and go without so much as the initial framework for a deal in place. The trade war has made a clear dent in the economies of both countries, and the longer it continues the deeper the global slowdown may become.

 

The pieces for a long-term sustainable rally in gold appear to be in place. The market seems to now find itself in a win/win situation regardless of what the Fed does or doesn’t do and stands to see further upside as global economic and geopolitical risks rise. The market’s intermediate-term uptrend remains intact, and buyers have thus far been willing to step in and scoop up the yellow metal on any dips. The market has also benefited from some recent weakness in the U.S. dollar, but will likely need a further breakdown in the greenback to really start making significant upside headway.

 

An increasingly dovish-Fed and the potential for rate cuts this year or next could set the stage for a major dollar decline. Such a decline would also likely coincide with a rising risk of recession, increasing risk aversion and lower equity markets. Put together, these factors form what could be the ideal recipe for significantly higher gold prices in the months and years ahead.

The Week Ahead In Gold

/in , , /by

The last couple weeks have demonstrated just how quickly things can turn in modern financial markets. Without question, last week’s FOMC meeting will remain a primary market-driver and subject of debate in the months and years ahead.

 

Has the Fed Lost All Credibility?

 

This is the question that investors may now be asking. Last week’s Fed meeting took even the most-dovish expectations and turned them upside down. The Fed’s actions-or lack thereof-could set the stage for significant dollar declines and higher asset prices. Put another way, the central bank is not willing to pop a bubble of its own making.

 

Not long ago, the Fed seemed willing to take the heat that stemmed from criticism of its ongoing policy “normalization.” Just a few months back, Fed Chief Jerome Powell had suggested that rates had a way to go before entering neutral territory. That opinion changed soon thereafter, when Powell said that rates may be closer to neutral than previously thought. The Fed then went ahead with previous plans to hike the Fed Funds rate by another 25 basis points in December.

 

The markets did not take the rate hike lightly, and the month of December saw a significant rise in volatility as equity markets suffered steep declines. Although numerous issues such as the ongoing trade war with China and arguably overstretched valuations likely played a role in the stock market pullback, most analysts seem to agree that a hawkish Fed was the primary culprit behind the sell-off.

 

The last few months have seen a steady stream of Fed criticism, with everyone from Mad Money hostJim Cramer to President Trump voicing their displeasure with the Fed’s course of action. The Fed has tried to maintain its independence, however, and as recently as several weeks ago reiterated its plans for further hikes this year.

 

Those plans now seem to have been thrown right out the window. In an abrupt about-face, the Fed has not only reversed its position on further rate hikes but has also said it will halt its ongoing balance sheet reduction.

 

In effect, the Fed has announced that it will keep “priming the pump.” Whether this decision came about as a result of increasing political pressure or significant changes in the central bank’s outlook, the central bank’s reputation is likely to take a major hit.

 

For investors, however, this makes one key issue crystal clear: The markets simply cannot do without ongoing Fed stimulus.

 

Not only has the Fed now halted all of its quantitative tightening measures, it has suggested that it may need to start easing again. The problem is, with the current Fed Funds rate at 2.25%-2.50% and the central bank still holding nearly $4 trillion in securities on its balance sheet, the Fed will have little ammunition to fight the next recession.

 

The smart money seems to recognize this. Recent inflows and bullish price action in the gold market may suggest that many investors see the writing on the wall and are looking to position accordingly. Although stocks may get an initial bump from these developments, the bubble will burst at some point. When it does, look out below. If price action related to previous Fed balance sheet expansion and contraction are a good indication, stocks could eventually decline by 50% or more.

 

The Fed’s actions are likely to make the next recession longer and deeper than the previous. The central bank’s inability to continue tightening is also likely to cause significant dollar weakness in the process. Any way you slice it, the current environment is highly bullish for gold and recent gains in the yellow metal could simply be the tip of the iceberg.