A Quiet Start

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The gold market is off to a quiet start as the new trading week gets underway. The yellow metal is up about $1.80 per ounce in early afternoon trade as stocks see renewed selling pressure while crude oil plunges. The oil market, in fact, traded for below $1.00 per barrel for the first time ever, and the May contract, which expires tomorrow, has moved to the lowest levels since the contract first began trading in 1983.

 

The hammering of crude oil is a mixed bag in the eyes of metals traders. The extremely low price, which is a result of a massive supply glut, is unnerving and fueling investor anxiety. The lower price, on the other hand, could be viewed as deflationary and could also cause worries, especially if prices were to maintain such low levels for a period of weeks or months.

 

Crude oil trading for less than $10 per barrel sems unlikely at this point, however, as the next contract for June delivery is still maintaining trade over $22 per barrel. If the COVID-19 crisis continues, however, demand for gasoline and oil could remain very low and crude oil could potentially sink further, keeping front month prices under $10 per barrel.

 

Unless there is a significant increase in demand for crude, supplies could continue to outweigh storage capacity. The current state of U.S. storage is full, and any subsequent oil could need to be disposed of by producers. May oil futures have turned negative in afternoon trade, moving lower to -$10 per barrel.

 

The onslaught in crude oil today has stock investors playing defense. The benchmark Dow Jones Industrial Average is down some 400 points for a decline approaching the two percent level. Another wave of significant selling in equity markets should not be surprising, however, as the market is now only about 15 percent below all-time highs made in February. The pace of the stock market’s recent rebound has puzzled many investors. Numerous analysts have warned against getting sucked into a market that will likely roll back over, and some have suggested that the lows have not yet been reached.

 

Heightened stock market volatility, heavy selling, zero percent interest rates and massive QE could all keep the gold market well supported in the weeks and months ahead. The bulls have a solid technical advantage currently, and gold prices are in the midst of a strong uptrend that could take prices back to previous all-time highs near $2000 per ounce or beyond. Support may be found in the $1675 region, while the bulls need to overcome resistance in the $1800 area.

 

In other news, recent data from the CFTC may bolster the bullish case for gold. A recent Commitment of Traders report showed that bullish positioning in the gold market by money managers has not changed much this month. The buying, the report showed, has been largely attributed to longer-term investment vehicles, such as ETFs, and could potentially point to rising long-term demand for the metal.

The Week Ahead in Gold

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The same stock market volatility that has been seen in recent weeks looks set to continue. Stocks lost ground on Monday but have thus far rebounded strongly on Tuesday. As stocks continue their back and forth price action, the gold market has maintained its steady climb higher.

The gold market is now approaching the $1800 level, a target cited by numerous analysts as the next potential stop for the yellow metal as it heads back towards previous all-time highs near $2000 per ounce. The metal is seeing benefit from several factors, including equity volatility, a weaker dollar and ongoing geopolitical as well as economic risk.

Although the infection rate for COVID-19 may be at or nearing a peak, it is still too early to tell just how much damage the virus has done economically. Current estimates by the International Monetary Fund, or IMF, put the damage to the global economy at a three percent annual economic contraction this year to be followed by a 5.8 percent gain next year. The U.S., according to the fund, is set to contract by 5.9 percent this year. Such an economic decline would represent the largest fall since the Financial Crisis of 2008/2009. The U.S. would then see a rebound of 4.7 percent next year, according to the IMF.

The worry over economic damage will be very difficult to quantify until the virus is brought under control. Although there are indications that current stay at home orders have significantly slowed the spread of the virus, there is no telling yet how long the virus may continue its rapid spread while keeping economies shut down. The U.S. appears to be getting ready to discuss the reopening of its economy, but already seems to have issues on who will make the call between President Trump and state governors. Many parts of the U.S. are to remain closed until the end of the month, and any reopening likely will not take place before that time.

Earnings season is now getting started, and many investors will be paying close attention for virus related declines. Current corporate earnings may show some of the beginning effects of the economic shutdown but will likely not show the full extent of the problem yet.

The dollar is also having an impact on the yellow metal. After peaking around the 104 level in March, the dollar has been trending lower and is now trading in the 99 area. Further weakness in the greenback could send the price of gold higher and could act as a major, bullish catalyst for a run to previous all-time highs or beyond.

The U.S. currency may be declining as the Federal Reserve takes massive action and as rates were recently cut to zero again. The longer the economy is closed, the lower the dollar could potentially go.

The next couple of weeks should provide additional clues about the virus and its spread. As more information is provided, stocks could potentially take another run at their March lows while gold could stay on the offensive.

The Week Ahead in Gold

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Both stocks and gold are getting the week off to a strong start. In late morning trade, the benchmark Dow Jones Industrial Average is higher by nearly 1200 points. Spot gold traded higher by 3% at one point this morning and is still up significantly for the session.

Hope for a peek in coronavirus infections is driving some investor optimism today. Some banks have also suggested that now may be the time to buy stocks, with the worst behind the markets at this point. Although it is too early to tell, some optimism is not surprising as Americans and people elsewhere continue to struggle with stay at home orders and as public meeting spots remain closed. In fact, President Trump recently extended the closure of bars, restaurants and other locations until the end of April. Most employers will also remain closed until the end of the month and a resumption of professional sports is still an unknown.

The recent monetary stimulus provided by the U.S. Government is also a positive. The package is likely way too small, however, to ward off the depths of the coming recession. It is important to keep in mind that even as businesses start to reopen and things get back to normal, consumer habits will have changed. People may not spend the way they did just a couple months ago, and a lack of consumer spending could send the U.S. into a recession the likes of which has not been seen since the Great Depression.

In addition to the threat of coronavirus spreading further and the economic challenges it may pose, the markets are also still dealing with an oil price war. Saudi Arabia and Russia are reportedly close to a deal that would cut production and likely give prices a lift. An online meeting was set for today to discuss a cut, but that meeting has been rescheduled and will now take place Thursday. The benchmark U.S. 10-year yield has inched up from levels seen late last week and is currently sitting around .65%. The dollar index is seeing some upside today as well, as the currency looks to maintain trade above the 100 region. Although a challenge of the March dollar highs could weigh on the gold and silver markets, a higher dollar may not currently affect the yellow metal as much given the surrounding circumstances.

The notion of a deep and extended U.S. recession may keep the gold market moving higher in a slower, more sustainable fashion. The market is poised to challenge the $1700 level in the days ahead, and if it stages an upside breakout it could challenge previous all-time highs near $2000 in short order. The gold market has already seen a significant pullback from recent upside, and that decline was met with willing buyers. The bulls would seemingly have a green light to take prices higher and may do so in the days and weeks ahead.