The Week Ahead in Gold

/in , /by

This week could be slower than last, as many investors avoid work, the markets and other responsibilities until the end of the holidays. The weaker dollar index likely played an important role in gold’s recent upside and could continue to do so.

 

The dollar weakness seen Monday was quite likely attributed to word that the U.S./China “phase 1” agreement would likely be signed sometime over the weekend. This initial agreement between the globe’s first and second-largest economies could potentially be a major step towards a viable, long-term commitment on trade. Few details have been released thus far, however, and it is unknown what concessions both sides will be making in order to make the deal work.

 

The idea of a U.S./Chinese deal being signed in the days ahead has reversed demand for risk-off assets, of which the dollar is part. If the U.S. and China appear to be seriously mending their trade relations, demand for dollars could see a significant decline as appetite for risk could rise. Although higher risk appetite could also weigh on gold, it could also ignite another reason for bullish investors to buy: Higher commodity demand from China and elsewhere could fuel a sharp rally in the yellow metal that could potentially see prices break out to the upside from recent highs. An upside breakout on the charts could, in turn, draw more buying interest into the market. A strong technical picture could take prices even higher in the process, possibly driving a rapid move towards previous all-time highs around $2000 per ounce.

 

Whatever the case may be, the gold market appears to have the pieces in place for a solid and sustainable run higher. What the primary catalyst may be, however, is still unknown. The bulls have maintained recent trade above the $1500 level and could look to take out previous highs in the $1550 region in the first sessions of the New Year.

 

In addition to ongoing U.S./China trade developments, the gold market has several other key issues that have the potential to drive the market sharply in both directions from recent levels. The ongoing Brexit saga could send waves through global financial markets, while another attack against Saudi oil could fuel a global crude scare and global recession. There is also the Trump impeachment to consider, although it appears to be quite unlikely that the U.S. Senate takes action against the President. Concerns over the next U.S. Presidential election could increase in the months ahead and could drive market volatility and selling in risk assets.

 

Whatever your outlook for the New Year may be, it is difficult to argue the notion that gold has several things working in its favor. If things calm down on the geopolitical scene and if stocks continue their run higher, there are still numerous, important reasons to buy and hold physical gold. As 2019 comes to an end and as the world gets ready to begin 2020, now is the time to keep your focus and approach on the long-term.

Clear as Mud

/in , /by

As North American equity markets generally made their way higher in 2019 (with hiccups in May and August), it was against headwinds of caution and uncertainty. Geopolitical market risks were elevated with many examples making headlines throughout the year. Front and center were the Brexit delays and negotiations, and a lingering UK election (for the third time in five years). Tense ongoing trade negotiations between the US and China consistently sat in focus. This past week, however, provided a little more certainty for investors. It also leaves a lingering question of, what’s next?

In a busy week, we look to finally see the finish line for the CUSMA, which is the trade deal to replace NAFTA. As to US trade with China, there is an agreement in principle being cheered by the US President that avoids the costly tariffs that were set to directly impact American consumers. And across the Atlantic, it looks like the UK Tories were delivered their mandate to put an end to Brexit. In summary, some of the headline risks to the year have moved on to the next chapter.

Spend any time watching business news on CNBC or Bloomberg, the way to avoid any questions on the outlook for the markets is the link to uncertainty or unknowns. As we move forward, a modicum of that market uncertainty was definitively removed this week. With the UK election a textbook market reaction ensued. The Tories received their strongest show of support since the 1980’s, and the weakest result for Labour since World War II. Friday, the British Pound Sterling was as much as two and a half percent higher against the US dollar, with similar gains against the euro.

This move in the currency markets put the pound at its highest level against the US dollar in 19 months and its highest against the euro since the Brexit referendum back in 2016. In a quick digression, it was then we recall the pound fell 8 percent against the US dollar for the biggest one day move in a major currency since the end of Bretton Woods.

In the next chapter of uncertainties, we have the UK pending divorce and trade negotiations with the European Union over the next 11 months. Also, in focus could be a forthcoming trade deal with the United States in a global environment that sees a continued trend of deglobalization associated with declining global trade volumes. The other obvious uncertainty of course is the next phase of negotiations to take place between the United States and China.

With regards to the United States and China, shortly following the announcement of Phase 1 of a deal are reports of skepticism and calls for details of which trade barriers will be removed. The overzealous reaction in the risk and commodity markets was pared back as it seems the details that have come forward are clear as mud.

There is the angle that this past week may give the equity markets a strong footing into the year-end, but skepticism also lingers for what lies ahead.

Download PDF

The Week Ahead in Gold

/in , /by

The gold market is slightly higher in early action Monday as stocks and investor risk appetite take a break from recent upside. As of this post, the gold market is up about $.80 per ounce at $1460.50 per ounce. The market had traded over $1464 earlier in the session but has come off its recent highs.

 

There are several factors this week that could influence the gold and stock markets. Two of the biggest potential issues could be the proposed tariffs going into effect against China on the 15th, as well as the UK election being held on the 12th. Of course, investors will also be paying close attention to any key pieces of economic data as well as the ongoing trade negotiations between the U.S. and China.

 

The continuing Brexit saga has put markets back on edge in recent weeks as the deadline again approaches. Although Boris Johnson and the Conservatives have a double-digit poll lead heading into Thursday’s vote, the gap has been tightening in recent weeks and anything could happen. Even with a victory, Johnson and the political party may not be able to pull off a Brexit deal as suggested. Lack of a deal, or a no-deal Brexit, could potentially lead to heightened market volatility and uncertainty in the weeks and months ahead.

 

Although recent discussions appear to be productive, the U.S./China trade war continues, with further tariffs set to go into effect on December 15th. If these duties are implemented, it could potentially undo much, if not all, of the progress that has been made in recent talks. On Friday, China waived tariffs on U.S. soybeans and pork as a show of good faith in recent discussions. China may be hoping that the U.S. will follow suit, yet President Trump appears to have no plans of letting China off the hook. China has asked the U.S. to roll back tariffs as part of a “phase 1” agreement, but the U.S., thus far, appears unwilling to do so.

 

If further progress between the globe’s largest economies is not seen in the weeks ahead, investors could become uneasy and selling in risk assets could intensify. Such a scenario could produce a lose-lose situation for the Trump administration, which needs to make a solid, pro-U.S. deal with China on trade but may also need stronger stock markets as the 2020 reelection campaign gets into full swing.

 

The gold market has thus far held above the $1450 level and may continue to do so. Although a more serious dip cannot be ruled out, the market may simply be waiting for a fresh, bullish catalyst to take prices back towards the $1500 region or beyond.

 

It may be unlikely that the yellow metal falls much further than recent lows, however, as numerous long-term issues may remain supportive in the years and even decades ahead. These issues include rising sovereign debt levels, central bank monetary easing, weaker fiat currencies and an aging equity bull market that is likely to run out of gas at some point.

Crisis Era Jobs Data

/in , /by

According to Statistic Canada’s monthly job report, Canada saw the biggest monthly drop in employment in November since the financial crisis. This staggering headline should have been somewhat anticipated given the recent disparity between employment growth tracked by StatsCan’s two different surveys; albeit, the shortened timespan over which this moderation occurred creates a shock. Job growth in Canada over the past year is now averaging approximately 26 thousand positions and growing at 1.6%, which is more in line with the broader performance of the Canadian economy.

Beyond the sticker shock, the most noticeable afterthought of today’s job numbers is that the Bank of Canada didn’t have this data when they chose to keep interest rates on hold this past Wednesday. As expected, going into the announcement, the Canadian central bank left rates unchanged for the ninth consecutive meeting.

Today’s data is further indication that the economy is softening into next year. And another headline Friday competing with the disastrous job numbers was that Stephen Poloz will not stand for reappointment as the Bank of Canada Governor. His term is up June 2, 2020. This too, although not a surprise, as no governor since Gerald Bouey in the 1970’s and 1980’s stood for two consecutive terms leaves further uncertainty around policy direction in the new year.

Forecasts have been consistent that the Bank of Canada would eventually need to keep pace with the rest of the Western World central bankers and follow their leads into cutting interest rates. For several reasons, Canada was able to hold off (for the time being), as the Canadian economy saw what may be viewed as anomalous strength through the third quarter. Business investment picking up was a positive indicator, but ultimately other macro indicators, and particularly ones linked to trade are seeing past strengths viewed as one-offs.

All bets are (or perhaps were) on for the Bank adjusting course in the beginning of next year, but what has been overlooked is whether Governor Poloz will position himself as a lame-duck. This would be in lieu of actively adjusting policy rates. This does not render him impractical in a scenario where he may need to be reactive, but in a ‘status quo’ economy and given his track record over the past near 7 years, the most probable outcome is a central bank shifting to the sidelines.

What we have witnessed with Stephen Poloz is a Governor that may often over-speak but has exercised more caution and restraint when it came to adjusting policy and rates.  Absent from economic conditions seriously deteriorating into 2020, it would seem more likely in the conservative realm of the central bankers that they hold the course. For this, there are examples in modern history where the incumbent does not look to prescribe the policy of their successor.

This does not necessarily alter our views for the direction of the Canadian dollar, which we still see trending lower into the new year. That said, it is also unlikely the economy falls out of bed, which for this reason enforces the status quo scenario. Canada’s job numbers were disastrous, but given the overshoot of the prior months, it’s more likely that we are witnessing a return to mediocrity.

The Week Ahead in Gold

/in , /by

As investors return from last week’s Thanksgiving Day Holiday, markets may see an increase in volatility and movement. Stocks are declining in early action on Monday, as some key pieces of economic data point to a slowdown. The gold market is thus far not seeing much interest, however, as prices are down nearly $2 per ounce at $1462.30.

The gold market has been stuck in a trading range in recent action, and may require a fresh catalyst, bullish or bearish, to break out of its recent range. Although stocks are moderately lower in early action today, the major stock indexes are not far from recent all-time highs. Investor appetite for risk also remains mostly upbeat and hopes for an initial U.S./Chinese deal on trade may also lend markets a large degree of support. Some positive economic data coming out of China over the weekend may also fuel some risk appetite and equity buying. Factory activity in China reportedly came in at 50.2 for November, a rise from October’s reading of 49.3. A reading above 50 indicates expansion, while readings below that level could signal contraction. The 50.2 reading is the first time in seven months that the nation’s PMI has shown growth and could potentially point to other gains ahead.

Although hopes are higher today for progress between the U.S. and China, President Trump has also commented today on metals tariffs from Brazil and Argentina. Trump said (via Tweet) that he will reinstate steel and aluminum tariffs on metals from these countries. The concern now may be what kind of retaliatory response to expect. The reinstatement of tariffs also comes at a time of rising hope for U.S./Chinese progress and could act as a major barrier to further upside in equity markets. President Trump is currently expected by some analysts to hold off on raising tariffs, a move set to take place on December 15th, in order to keep U.S./Chinese negotiations going strong. A lack of an increase could potentially weigh on gold while giving stocks and risk assets a boost. An increase as planned, however, could potentially fuel risk aversion, sending equity markets lower while providing a potential boost to gold and other hard assets.

In other news, police activity picked up in Hong Kong over the weekend. Police reportedly fired tear gas into a crowd of protestors in Tsim Sha Tsui on December 1st. Although no major injuries have been reported, the move could signal a rise in tensions between protectors and lawmakers. After nearly six months of unrest, the Hong Kong economy is set to show some lesions. The city could post its first budgetary deficit since the early 2000s. In addition, retail sales and other key economic indicators could potentially show significant weakness due to the unrest. Economic growth could be lower by two percent, or even more, this year due to ongoing unrest. Companies, both large and small, will soon be faced with major decisions. As rental agreements and employee bonuses become due, many businesses could be forced to close shop. Others could look to stay open, however, and may try to negotiate heavily on rental space and other costs of doing business. Visitors to Hong Kong have also declined sharply, reportedly by some 44 percent in October, to make matters even more challenging. The months ahead could pose a large degree of risk not only for Hong Kong but for China and the global economy.

The widespread assortment of economic and geopolitical risks may keep a floor under gold prices. The bulls have, thus far, been able to maintain trade above support at the $1450 level but need to see more upside in order to attract more fresh buying interest. The $1500 level may act as resistance on any significant rallies. A breakout above this region, on a closing basis, could lead to sharply higher prices in a short period of time.