The Week Ahead In Gold

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The week ahead could be a doozy. On Friday, Special Counsel Robert Mueller III submitted his long-awaited report on Russian interference in the 2016 U.S. Presidential election. Mueller sent the report directly to Attorney General William Barr, who will now decide how much, if any, of the report to release to Congress and the American public.

 

Over the weekend, Barr reviewed Mueller’s report and communicated to members of Congress his primary findings: that there appeared to be no collusion between Trump, his campaign and Russia and that no conclusion was reached on whether Trump obstructed justice or not. The report, which was nearly two years in the making at a cost of over $25 million, is already being hotly debated. It is important to consider that Mueller made note in the report of the fact that while it did not show any crimes committed, it did not fully exonerate the President either. Democrats have certainly taken notice of this and other issues with the report and its rapid release by Barr, and a further showdown could be in store as Democrats call Barr or even Mueller to testify.

 

Markets are also grappling with an inverted yield curve, and investors sold stocks aggressively late last week as recession fears fueled risk aversion. The yield curve inverted for the first time since 2007 on Friday, and such a condition is considered a reliable recession indicator.

 

The yield curve inversion comes on the heels of another dovish Federal Reserve meeting. The central bank has now essentially removed any expectations for further rate hikes this year and has lowered its expectations for growth. The Fed clearly sees some substantial risks to the economy and the bond market is sending a signal that should not be overlooked.

 

Making the yield curve inversion even more concerning is the current state of monetary policy. Although the Fed had set out to “normalize” monetary policy and has been hiking the Fed Funds rate since 2015, current rates only stand at 2.25%-2.50%. Prior to the Great Recession of 2008/2009, the Fed Funds rate had been at 5.25%-5.50%. The central bank has considerably less room to work with this time around and may not be able to create the desired shock-and-awe effect of rapid rate decreases. The Fed’s balance sheet is also still full of assets, having peaked at about $4.5 trillion and currently sitting around $3.9 trillion. The central bank may be very reluctant to start up the printing presses again with QE4 given the already-swollen size of its balance sheet.

 

Adding to investor anxiety over the rising risk of recession is a recent lack of progress in U.S./China trade talks. Although recent rounds of talks between trade officials had been considered positive, they have still not led to a sit-down between President Trump and Chinese Leader Xi Jinping. A formal meeting may need to take place before the June G20 meeting in order to keep recent momentum going. With the Mueller investigation out of the way-at least for now-President Trump may find himself in a stronger position and China may have more incentive to reach a long-term agreement.

The Week Ahead In Gold

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The gold market is slightly higher in early trade Monday as a weaker dollar index gives the market a boost. Markets are fairly quiet across the board to start the new trading week as there was little news over the weekend to shake things up.

 

This week’s FOMC meeting taking place Tuesday and Wednesday will likely be a primary area of focus for investors. The Fed is not expected to make any changes to its current policy. Investors will, however, be looking for any clues about the central bank’s plans for the months ahead. The Fed has taken a decidedly more-dovish tone in recent months, and that dovishness has given stocks some ammunition as they attempt to embark on a fresh leg higher. Likewise, the about-face from the Fed has also given gold and dollar-denominated assets a lift. Although no major changes to the Fed’s current wait-and-see approach are expected at this time, any commentary from central bank officials alluding to a more aggressive approach could be market-moving.

 

Markets will also be looking for any fresh developments in the ongoing Brexit saga. Thus far, the U.K. has no “soft Brexit” deal in place ahead of the March 29th “hard Brexit” date. Prime Minister Theresa May is likely to present another deal before Parliament prior to that date, but it remains unclear if she will be successful in negotiating a deal. Brexit discussions have been taking place now for two and a half years, and the outcome remains up in the air. There is the potential for a lengthy delay, a disorderly exit without a deal, an exit using May’s deal or even another EU membership referendum. As the deadline for a deal approaches at the end of the month, any lack of progress could fuel a large degree of risk aversion and could again trigger significant market volatility and selling pressure as it did when Great Britain first voted to leave the EU.

 

The continuing U.S./China trade negotiations may also begin to fuel some risk aversion and volatility again in the weeks ahead. Investors had become increasingly optimistic in recent weeks after a series of talks between trade officials from both countries were deemed to be fruitful. That optimism may begin to fade quickly, however, as there is still no meeting set for U.S. President Trump and Chinese Leader Xi Jinping to sit down and formalize and agreement. Recent reports have suggested that such a meeting may not take place until June.

 

In other news, the CFTC recently reported that money managers have scaled back their bullish positioning in the gold market. The CFTC’s most recent “disaggregated” report showed managers cutting long positions from 31,247 the week prior to 17,407 as of March 12th. The rise in gross-short positions of over 11,000 contracts would seem to suggest that a wave of fresh selling hit the market. This long liquidation and fresh selling interest could be attributed to a variety of factors, although the market’s failure to maintain recent upside momentum was likely a major influence.

The Week Ahead In Gold

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Over the weekend, Fed Chairman Jerome Powell gave an interview to CBS’ “60 Minutes” in which the head central banker stated that President Trump cannot fire him. Although Powell avoided direct commentary regarding the criticism from President Trump on the Fed’s policy actions, he did seem to make clear that he intends to serve out his term basing monetary policy on the economy rather than political considerations.

 

Over the last two years since Trump took office, the economy has been firing on all cylinders, seeing the best gains since the recovery began a decade ago with nearly 3% growth for last year. Some recent signs of weakness, however, may be symptoms of a larger, global slowdown that could potentially derail U.S. growth. Last week’s jobs data which showed the U.S. added just 20,000 jobs for February would seem to ratify concerns over first quarter growth. In addition to significant weakness in key data points, investors must also consider the fading tailwinds from tax cuts and corporate stock-buybacks. Put another way, the stock market rally may now be on its last legs.

 

The growing concerns over U.S. and global growth make the timing of Powell’s interview somewhat interesting. After hiking rates four times last year, the Fed is now “on-hold” and could potentially stay on the sidelines for the rest of the year. Some have even begun making the case for the Fed to start lowering rates again this year, and with little inflation to speak of, such a scenario may be increasingly plausible if the data stream shows further weakness.

 

The Fed now seems to find itself in a corner with no simple solution. If the central bank elects to lift rates again later in the year, stocks and risk assets could again come under significant pressure. If the Fed elects to sit tight or cuts rates, the dollar is likely to see a significant decline. Either scenario could be highly bullish for gold and dollar-denominated asset classes.

 

The ongoing U.S./China trade talks appear to be headed in a positive direction and investors are hopeful a deal may be reached soon. The tariff war has put a dent into the economies of both countries, and an agreement being reached could set the stage for what may be the final rally in equity markets. Looking at the bigger picture, it is unclear if a deal will be enough to put upwards pressure on growth rates and many of the current weak points are likely to remain weak without central bank intervention.

 

With so much uncertainty surrounding trade and the global economy, the gold market has entered into a consolidation phase. The market has thus far seen buyers step in at key support levels around the $1280 area but has yet to mount another challenge higher. The market could potentially spend some time in its recent trading range until more clarity is seen on a potential trade deal and until the Fed provides more clues regarding its plans for rates.