The Week Ahead in Gold

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There is less risk aversion in the marketplace as the new trading week gets started, and easing fears are weighing heavily on the gold market. In early action, the yellow metal is down at a seven-week low, trading into chart support around $1480 per-ounce.

 

The market is reacting to news that the Trump administration is not considering limiting U.S. investors’ activity in China or the de-listing of Chinese companies by U.S. stock exchanges. The initial reports of such possible actions late last week threw markets a curveball, but thus far there does not appear to be any substance behind the reports. Such a move would represent a significant escalation in the ongoing trade war and could potentially fuel a large degree of risk aversion and even panic.

 

The trade war remains a major focal point for investors, and there is some optimism as the next round of talks approaches. A Chinese delegation will be coming to the U.S. for high-level talks on October 10th and 11th, and at the very least markets are hoping for the initial groundwork for an agreement.

 

The Trump impeachment drama is also likely to garner attention. Although stocks initially sold off on the news and gold got a boost, equities have since bounced back. Thus far, it seems that the impeachment inquiry has been largely swept under the rug and it’s business as usual. That could potentially change, however, if the recent whistleblower complaint gains more traction.

 

Of note is recent dollar strength. Since the impeachment proceedings were announced, the dollar has been on the rise and is now sitting around a fresh 12-month high. Investors appear to have a preference for the greenback over gold at this point and should that trend continue it could potentially keep pressure on the metal.

 

A key line in the sand for gold may be the $1480-$1490 area. A solid close below this region could signal further downside and could cause more bulls to throw in the towel. Although such a move could send the market lower and negate the recent uptrend, a significant leg lower or bear market seems highly unlikely.

 

Against the current economic and geopolitical backdrop, the market may not fall too far. Numerous issues, including a failure of trade talks, a no-deal Brexit, an escalation of Iranian tensions and the Trump impeachment proceedings could all move markets quickly. Given the Fed’s data-dependent stance as well, key economic reports may also move markets as rate expectations change. This week, the latest ISM Manufacturing data as well as the September non-farm payrolls report could point to further economic weakness or a rebound. Any significant misses in the data could send gold back to $1500 in a hurry as markets become increasingly dovish. Significant strength in the data, however, could be a major negative for gold as it could keep the Fed from taking a more aggressive approach to further easing.

 

Ongoing weakness in China, the EU and elsewhere is likely to keep the central bank easing trend intact, and the ongoing era of cheap money should continue to be supportive for gold.

The Week Ahead in Gold

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The gold market is off to a good start to kick off the new trading week as prices are up over $8 per-ounce in early action. Strong safe haven demand and technical buying are featured and could potentially lead to further gains in price in the coming sessions.

 

Last week, the U.S. Federal Reserve cut the Fed Funds rate by 25-basis points in a move that was widely expected. The central bank did not, however, paint a very clear picture of further easing. The reaction to the cut was muted, and the Fed may have to take a far-more dovish tone in order to keep stock investors appeased. A lack of progress on trade and other geopolitical risks could potentially force the Fed to become more aggressive in the months ahead.

 

There is mounting evidence that the global slowdown could be accelerating. Recent eurozone manufacturing data was downbeat to say the least and has fueled an increase in risk aversion. Activity in Germany’s key manufacturing sector sank in September to the lowest level in more than a decade. The nation’s manufacturing purchasing managers’ index declined to a reading of 41.4, well into contraction territory and far below analyst estimates of 44. The country’s composite PMI, which includes both the manufacturing and services sectors, declined to a seven-year low.

 

As the economic engine of the eurozone, such weakness coming out of Germany is a major cause for concern. Ongoing anxiety over trade, Brexit and other economic and geopolitical issues are all taking a toll, and the ECB will likely be forced to implement further measures in order to prevent the region’s economy from slowing further.

 

The U.S./China trade war also continues to fuel safe haven buying. Stocks saw early gains slip away to end the trading week as news spread that Chinese negotiators would not be meeting with farms in Montana and Nebraska as planned. High-level meetings are still set to take place early next month in Washington, however. A lack of progress at those meetings could fuel heightened volatility and a more significant downturn in stocks.

 

Tensions in the Middle East also remain elevated following the recent attack on Saudi oil facilities. The U.S. has ordered further sanctions against the central bank of Iran and has also ordered more troops to the region to strengthen Saudi Arabia’s air and missile defenses.

 

The fundamental and technical landscape for gold looks very positive. The ongoing trade war, Brexit, Middle East tensions, unrest in Hong Kong and the accelerating global economic slowdown may all keep the metal well-supported. From a technical perspective, the uptrend is intact, and prices could be gearing up for a challenge of recent highs. Thus far, willing buyers have stepped in to buy the dip to $1500 or less, and that trend may continue until proven otherwise. With so many major issues at stake, it is difficult to see a scenario in which the yellow metal sees a more significant decline.

The Week Ahead in Gold

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Another major geopolitical issue can now be added to the list of bullish catalysts that could potentially send gold sharply higher. Over the weekend, the largest Saudi production facility was attacked, igniting fears of a major conflict in the Middle East. The attack reportedly removed 5 million barrels per day from the market which is over half of total Saudi production. The cut in production is the largest ever and sent oil prices soaring. Brent crude leapt by 20 percent on the news while WTI crude also saw a significant double-digit jump.

 

The U.S. believes that Iran was behind the attack, although the country has denied any involvement. President Trump was quick to respond, suggesting that the U.S. could potentially take military action once the perpetrator was known. He also said that he would authorize the release of oil from the Strategic Petroleum Reserve if necessary to keep the market well-supplied.

 

No official timeline has been given yet for restoration of production to previous levels. Some reports have suggested that about one-third of production could be restored as early as Monday.

 

The attack on Saudi oil facilities represents an attack on the global economy. If the damage cannot be repaired quickly, there are concerns that oil prices could spike to $75 or even $100 per barrel. A sharply higher oil price could potentially be the straw that broke the camel’s back as the global economy is already fighting a significant slowdown. Not only could higher oil prices put the economy into recession, but they could also cause central banks to rethink their currency policy stances if higher costs are paid by the public as inflation accelerates.

 

As markets continue to monitor the situation in Saudi Arabia, any further attacks or military action taken by the U.S. or its allies could stoke significant risk aversion. If crude prices continue to rise, that too may cause market unrest and increasing volatility.

 

The major economic news of the week will be the FOMC meeting. The Fed is widely expected to cut the Fed Funds rate by another 25-basis points at the conclusion of the meeting. As another rate cut has already been “baked into the cake,” markets will likely focus their attention on the central bank’s commentary, looking for any clues about its plans going forward. The notion of additional cuts has been a major influence on the recent rally in gold, and any hawkish commentary from the Fed has the potential to fuel some profit taking and even a significant pullback.

 

The three-month uptrend on the daily chart is still intact. The bulls are having some trouble defending the $1500 region thus far, however, and a test of technical support around the $1485 level could be seen soon if the market fails to put together a sustainable rally.

 

Given the current economic and geopolitical backdrop, prices may not have to fall far before finding more willing buyers. The combination of a slowing global economy, central bank easing and numerous geopolitical risks may keep any dips in the market shallow and viewed as an opportunity to buy on sale.

The Week Ahead in Gold

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The markets will kick off the shortened trading week following the Labor Day Holiday with all eyes again turned to the ongoing U.S./China trade war and the latest developments in the Brexit saga.

 

Over the weekend, 15 percent tariffs went into effect on about $110 billion of Chinese goods in the latest escalation in the war on trade. Although China has not implemented further retaliatory tariffs-at least not yet-the move is seen as just the latest step in the feud that could potentially see additional, significant tariffs put into place.

 

The trade war was a very influential theme for markets in August and was the primary catalyst behind rising volatility and some sharp sell-offs. Now that summer is winding down, stocks could have even more problems ahead. Since 1950, September has been the weakest month for stocks, seeing an average decline of about .5 percent. Any further action taken by the U.S. or China is likely to fuel risk aversion and lower equity prices.

 

Some analysts have suggested that thus far the war on trade has not had a significant impact on the economy. The latest round of tariffs may hit consumers directly, however, as rising prices may be unavoidable.

 

Any fresh news on the trade war front has the potential to move markets, but it won’t be the only major area of concern for investors this week. The latest Brexit news could also have significant, global implications and will be closely watched by world markets. As the latest Brexit deadline of October 31st rapidly approaches, lawmakers return from summer recess today and will have the opportunity to prevent a “no-deal” Brexit. Prime Minister Boris Johnson has threatened to call another snap election for October 14th, however, if any efforts are made to block a “no-deal” Brexit. The ongoing uncertainty surrounding the situation has caused the pound to tumble, and the currency recently hit a fresh 34-year low against the dollar.

 

The civil unrest in Hong Kong may also continue to be a source of anxiety for global markets. Protestors recently blocked roads near the airport-one of Asia’s largest-and some flights had to be cancelled. Train and bus service to the airport had to be suspended from the outlying island of Chek Lap Kok and some travelers were forced to walk to the airport. Protestors even attacked a nearby train station. The arrival of busloads of riot police eventually caused the protestors to disperse, but the situation is quickly getting far more serious and dangerous. The question now appears to be whether China will step in to quell the unrest, and if so, how it may plan to do so.

 

The current economic and geopolitical landscape is fraught with danger that may keep a high level of risk aversion in the marketplace. As traders return from summer vacations, markets will likely be driven primarily by headline risk and any further data that points to a significant economic slowdown.

 

Against the current geopolitical backdrop, the gold market will likely stay on the offensive and a challenge of resistance at the $1600 region could be seen in short order. As the market builds a higher base, significant support may be seen at the $1500 level and any dips are likely to be aggressively bought.