The Week Ahead in Gold

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Out of the challenges faced in recent weeks, some positives have emerged. Despite having to contend with numerous, potentially negative headlines, the gold market has shown some significant resiliency and could be set for a bounce-back in the sessions ahead.

 

Worries over a global slowdown have continued to dissipate, at least for now. Last week, the U.S. reported a very respectable 3.2% GDP figure for the first quarter and other key data points have also pointed to economic strength. Stocks have come roaring back to life, as key benchmarks have carved out fresh all-time highs. Appetite for risk appears to be robust and market volatility continues to decline.

 

On top of this, the dollar has also recently hit a two-year high. The stronger greenback has likely been a major factor in the lack of upside follow-through in gold and the currency could potentially have further room to run if the data stream remains strong.

 

The combination of encouraging economic data, higher equities, a stronger dollar and a lack of risk aversion would normally spell trouble for the yellow metal. That did not occur this past week, however, as the metal rebounded from recent lows. Gold has now climbed back into a previous support region from $1280 to $1290 and could potentially target further upside this week.

 

The last several sessions have shown some core-strength in gold and could potentially be indicative of a bottom having been reached. The next several sessions will be key, however, as the metal must now continue to move higher to negate recent chart damage and technical selling.

 

For the patient, long-term investor, the recent dip in price could potentially prove to be an excellent buying opportunity. If gold is able to withstand all of the negatives thrown at it this past week, just imagine how it may perform once market dynamics change. At some point, they will, possibly in dramatic fashion.

 

There is simply no telling just how much stocks and the dollar may have left in the tank. Both could have further room left to run higher before they finally top out. It is difficult to picture a scenario, however, in which both stocks and the dollar continue to rise together. As the dollar strengthens, U.S. equities become more expensive to foreign buyers. Not only could a strong U.S. currency weigh on equities, but other factors such as the Fed and current valuations could also cause investors to begin to shed stocks.

 

The dollar is likely continuing to enjoy the benefits of tax cuts and government spending along with ongoing issues in Europe and elsewhere. These trends are not likely to continue indefinitely, however, and once the sugar-high wears off the currency could come under pressure. In addition, and increasingly dovish Fed could also potentially weigh on the currency.

 

The gold market appears to be in its comfort zone for the time being and has shown little interest in probing lower levels. The key 200-day moving average, currently in the $1267 area, has provided some market support thus far and may keep a floor under the market as the bulls attempt another rally.

Bank of Canada Surprise

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Leading into the Bank of Canada’s (BoC) interest rate and policy announcement this past Wednesday, expectations were for the Canadian central bank to abandon any guidance of future rate increases. Those expectations were met. The big surprise though was that the Canadian central bank dramatically trimmed their economic growth forecasts for 2019. Following a sobering start to the year, and echoed by private sector economists with calls for the Canadian central bank to move to the sidelines, the Bank of Canada seems to have made explicitly clear they have shifted their policy approach to “wait and see” and have matched the US Federal Reserve in removing any hawkish bias.

 

The headlines emanating from the bank’s statement seemed to be enough to finally see the Canadian dollar give way and break US$0.745. Whereas dollar dynamics have evolved from a relatively stronger US Federal Reserve ahead of other western nations in a path to normalizing interest rates, many FX watchers are beginning to question the return of the commodity currencies (of which the loonie may still be included). As the Bank of Canada’s policy approach remains in line with their US counterparts, it seems the greenback may maintain the strength advantage for the time being. But, as analysts at JPMorgan recently noted, when the USD dollar index volatility is this suppressed for this sustained length of time, we’ve seen on average a 10% price move (both higher and lower) in the index.

 

From all indications, it does not seem the Canadian central bank will be the contributing factor to future major moves in the Canadian dollar for the time being. What was most noteworthy about Canada’s central bank trimming their GDP forecasts is that it implies interest rates may not be moving for the next couple of years. Like the period of July 2015 through to July 2017, overnight interest rates may not change. Most of the reason for this is due to how conservative the Bank’s growth forecasts have shifted.

 

The Bank of Canada is traditionally the most conservative forecaster of the Canadian economy. What was perhaps misinterpreted by some was that they saw the Bank’s view shifting to be ultimately bearish. What is more likely though is that this also provides them with downside protection to not have to cut interest rates. One of the major concerns for the BoC during their period of accommodative rates was how household debt levels continued to elevate. Avoiding going back to that scenario, which was a product of lower rates, is certainly at the forefront of their policy discussions.

 

The final takeaway from Wednesday’s announcement is really solidifying a step towards greater clarity. For a central banker that began his tenure without the inclination that every time he publicly spoke his words would be heavily scrutinized, Stephan Poloz has taken great strides towards greater transparency, eliminating what in the past proved to be noise or misdirection. The final reference in the policy statement outlined their focus to household spending, global trade, and oil markets. It would seem paramount, to gather any insight into anticipating future policy changes from the Canadian central bank, that’s where investors should focus.

The Week Ahead In Gold

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The gold bulls may be looking for a rebound in the week ahead after the metal saw some sharp selling last week. Thursday’s action saw the brunt of the selling pressure as the metal declined by 1.5%. Although a host of factors could be at work, the steep drop was most likely fueled by increasing risk appetite and a stronger dollar index.

 

It is looking increasingly likely that ongoing U.S./China trade negotiations are going to bear fruit. Although no specific date has yet been set for President Trump and Xi Jinping to sit down and formalize an agreement, recent talks have reportedly been very constructive and at this point it may simply be an issue of finalizing the details.

 

Reports of an agreement getting closer to fruition and some positive data coming out of the world’s second-largest economy have boosted stocks in recent days and fueled appetite for risk. Recent data released on trade and construction activity, among other reports, sent equities higher and seemingly provided global markets with a collective sigh of relief. Although China has certainly seen some bumps in the road, its economy may be stabilizing and a formal agreement on trade with the U.S. may send global markets even higher while boosting overall economic output.

 

With the U.S. Fed on hold and potentially even being forced to cut rates sometime this year, any signs of strength out of China may drive the dollar lower against key rivals. Recent dollar strength has likely played a major role in the lack of upside follow-through seen in gold in recent months and a significant breakdown in the currency could potentially pave the way for a more sustainable rally higher.

 

Although a weaker dollar could be bullish for gold, stock markets may hold the key to a significant upside breakout. Gold has already shown that it can move higher despite a stronger dollar, but yield-hungry investors have shown a strong tendency to turn to stocks as markets have recovered since the first of the year. Recent market action has put the benchmark S&P 500 within striking distance of previous all-time highs, and given the buying seen in recent days the market looks intent on seeing a 3000 print in the index.

 

As stocks have approached those previous highs, the gold market has simply tried to “hang in there.” Recent dips into the $1280-$1290 region have been bought and the area seems to have a great deal of willing buyers. With or without a weaker dollar, however, the gold market may need to see a breakdown in stocks before moving significantly higher.

 

The week ahead will have markets watching for further U.S./China trade developments and more positivity out of the Chinese economy. Further signs of stabilization in China may send stocks higher yet but may weigh on the dollar at the same time. The major test, however, will occur once the initial euphoria has worn off. In classic “buy the rumor sell the fact” fashion, stocks may simply run out of gas once a trade deal is done and as things are looking better in China. Such market exhaustion could coincide with a major, long-term top in equity markets despite an increasingly dovish Fed.

 

Such a scenario could potentially set the stage for a sharp rally higher in gold and alternative asset classes that could propel the metal into the next phase of a cyclical bull market.

The Week Ahead In Gold

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Although gold has not been able to extend its recent rally, the market could potentially be turning a key corner that could pave the way for a more sustainable run higher. A number of issues currently in play could set the stage for an upside breakout from recent highs and such a move could be swift and severe.

 

The Federal Reserve has taken a decidedly more-dovish tone in recent months and has now taken all rate hikes off the table for the year. Given many of the symptoms of a global slowdown, this is not all that surprising. What perhaps is a bit surprising, however, is the notion of the central bank cutting rates this year. After all, it was not long ago that the Fed had another three rate hikes penciled in for 2019 and that its balance sheet contraction would be on autopilot. How quickly markets can change…Markets are now pricing in over a 50% chance of a rate cut by the end of the year.

 

The Federal Reserve has tried to maintain its independence in recent months as it has endured a barrage of criticism from President Trump. As the global slowdown has increased in intensity, Trump is now calling for the central bank to implement QE4. It is unclear if such action will become necessary. After a solid non-farm payrolls report last week, some analysts have suggested that recent economic weakness is transitory in nature and that the economy remains on solid footing. Whether it is in fact necessary or not, there are other factors at play as well-namely the 2020 Presidential election.

 

Trump knows that if the U.S. does in fact enter a recession, his chances of becoming reelected may decline significantly. He also understands the power of loose monetary policy and how it may keep the economy and markets moving higher through his reelection campaign. Put simply: higher markets may mean reelection while lower markets or recession could mean no reelection.

 

The Fed has thus far done its best to avoid getting involved in politics. Despite being a frequent target of Trump’s displeasure, Fed Chief Jerome Powell has continued to conduct policy as the central bank sees fit according to the data and other factors. Given the Fed’s recent about-face, however, you have to wonder if the central bank is starting to bend a bit to political pressure. On the other hand, the global slowdown may just be a greater cause for concern than many anticipated and the Fed is seeing just how weak it really is.

 

Regardless of the Fed’s motivations and whether it is forced to cut rates or not, borrowing costs are not likely to go significantly higher any time soon. The current 2.25%-2.50% Fed Funds rate is only about half of what rates were prior to the 2008/2009 financial crises. Not only is the economy’s inability to handle higher rates a cause for concern, but the Fed will have far-less ammunition this time around if it decides to start cutting again.

 

The notion of an ongoing period of low rates and possibly even more quantitative easing could potentially keep the gold market well-supported in the months and years ahead as the dollar is likely to weaken substantially.

The Week Ahead In Gold

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Things are not always what they seem…The old saying could make a great deal of sense against the current economic and geopolitical backdrop. With the conclusion of the Mueller report now in the rear-view mirror, investors will again focus their attention on the bigger picture. They may not, however, like what they see.

 

The Federal Reserve and the path of monetary policy will be a primary area of focus in the months ahead. After the latest Fed meeting, markets are not expecting any further hikes from the Fed this year. Some Fed officials and analysts have, however, suggested that more hikes may still be appropriate. Although the economy remains strong, some cracks have begun to emerge that could potentially spell trouble for the globe’s largest economic engine.

 

Not only have rate hike expectations pretty much been thrown out the window, but there seems to be increasing talk of the Fed even starting to ease again. That is where things started to look far more interesting late last week. On Friday, White House Economic Advisor Larry Kudlow suggested that the Fed should cut rates by 50 bps “immediately.” Kudlow’s comments should not come as a surprise, as President Trump has been highly critical of the central bank and its rate hikes for some time. It has fueled some speculation, however, that perhaps the economy is not as solid as some think. Looser monetary policy could also potentially be used as a hedge of sorts if a trade agreement with China is not reached in the weeks or months ahead.

 

Despite the Fed’s increasingly dovish stance, the dollar index has continued on the offensive and has likely been a major factor in gold’s recent pullback. Several factors may continue to keep the greenback moving higher, as investors seek out its perceived safety and stability. Concerns over U.S./China trade talks, the uncertainty surrounding Brexit and even a change in tone from the ECB may all keep a bid in the U.S. currency.

 

The dollar is back at a multi-month high and could potentially be on the verge of an upside breakout. How much room the currency may have to run is unclear but further gains above recent highs may be limited. A resolution to any of the above issues could put some significant downward pressure on the currency and force a change in trend. A weaker dollar could give the gold bulls a breath of fresh air and fuel higher prices. If U.S./ China talks break down, or if a no-deal Brexit is set to take place, the flight to safety could be significant enough to propel gold higher despite a stronger dollar.

 

Markets will be watching the data stream closely in the weeks and months ahead as concerns over a major global slowdown mount. Key data points such as housing and manufacturing have shown measurable weakness in recent months, and the latest reading on consumer spending and inflation did nothing to alleviate those fears.

 

The significant economic slowdown along with benign inflation may allow the Fed, and even other central banks, to ease again if necessary. An extension of ultra-low rate policies could keep a floor under the gold market and other dollar-denominated assets.

 

In the meantime, gold has fallen back into its previous trading range and will likely find significant buying interest on any dips towards the range-bottom around the $1280 area. The gold bulls may simply be in a holding pattern until the next major buying catalyst comes along.