Equities on a Tear

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U.S. markets are on a tear Tuesday as investors return from the Memorial Day holiday weekend. Investors appear to be feeling less anxious, as the benchmark Dow Jones Industrial Average is up nearly 700 points for a gain of nearly three percent. Hopes for an economic recovery and fresh news about a potential COVID-19 vaccine are behind the day’s gains in stocks.

 

As stocks are on the rise today, gold has been on the decline. The yellow metal has shed nearly $30 per ounce in early afternoon trade. It has maintained trade over the $1700 level, however, and today’s dip could be viewed by some as a buying opportunity.

 

Although things may look a bit more promising for investors today, U.S./China trade relations continue to deteriorate. The recent exchange of barbs between the globe’s first and second-largest economies has done some damage, and those wounds may take significant time to heal. At risk is the initial trade agreement reached between the two nations a few months ago. If that agreement were to fall apart, it could set the stage for a multi-year battle that could potentially fuel global economic damage. Some have suggested that relations between the U.S. and China going forward could be similar to those seen between the U.S. and U.S.S.R during the Cold War. The U.S./Soviet conflict lasted for decades and so could the conflict over global trade.

 

In a move that is unlikely to please the Trump administration, the Central Bank of China this week fixed the value of its currency, the yuan, to the weakest rate against the dollar in about a dozen years. Any further escalation in the trade standoff could send stock markets sharply lower while providing fuel for the gold bulls. The U.S. also commented on Chinese plans to implement national security laws in Hong Kong and said that such a move would be met with sanctions. Protests in Hong Kong have recently resumed and could become an increasing source of global geopolitical tension.

 

In other news, the crude oil market continues to rise, and additional production cuts are forcing a soak-up of current inventories. Russia has recently discussed extending its agreed-upon cuts past June in an effort to rebalance the oil market that has seen a major crash that took prices for May delivery into negative territory at one point. It is unclear if Russia will in fact extend cuts to its production, but it has become very clear that the market is oversupplied while demand has declined significantly. Higher crude oil prices may potentially be bullish for gold, as investors look to hedge against rising inflationary pressures.

 

The gold bulls remain in technical control of the market. They will need to show some signs of life soon, however, to avoid further selling pressure taking the market back below the $1700 level. Support may be found in the $1670ish region if the market does see a further dip. The bulls are not likely to get overly excited until the market rallies above $1750 on a closing basis.

Outside Markets Pressure

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The gold market is slightly lower in early Monday action as key outside markets pressure the yellow metal. In early action, the dollar is higher while crude oil prices are lower. Stocks are also moving lower, with the benchmark Dow Jones Industrial Average down over 150 points in early action.

 

A major theme this week and for the coming weeks will likely be the reopening of economies, Different states in the U.S. are now attempting to reopen for business, and other areas of the world are also looking to get their economies rolling again. The reopening of areas presents several significant challenges, however, and will likely be performed at a very slow, controlled pace. A resurgence of COVID-19 infections is a major risk being faced, and should the virus start to accelerate its spread, many economies could find themselves quickly shut down again, perhaps for an even longer period.

 

U.S./Chinese relations remain strained currently. The two sides have exchanged shots about China’s handling of the virus as well as the origin of the virus. President Trump reportedly has suggested that COVID-19 may have been manufactured in a laboratory. Whatever the case may be, the initial handling of the virus and China’s communications surrounding it remain a sore spot between the nations and could even throw a major monkey wrench into previous trade negotiations.

 

As the U.S. and other nations battle against COVID-19, the notion of negative interest rates has gained steam. Although the U.S. is not negative, at least not yet, Fed Funds have at times implied negative territory in recent weeks. The argument for or against going negative is likely to continue, and Fed Chief Jerome Powell may set the record straight this Wednesday during a discussion on current economic issues online. The idea of rates moving into negative territory is likely to remain an important topic in the weeks and months ahead.

 

The gold market remains in a strong uptrend, and although prices have dipped below the $1700 level in early action today, the bulls may be willing buyers on any significant weakness. The yellow metal seems to have all the right things going for it currently, including a high degree of risk aversion, massive government debt, low interest rates and weaker currencies.

 

Although the market is taking a bit of a breather in early action today to start the trading week, the bulls will likely keep their focus on the $1800 level as the next potential target. A breakout above this level, on a closing basis, could set the stage for a return to previous all-time highs near $2000 or beyond. With little upside chart resistance ahead, the bulls could even see a rapid run higher into fresh all-time highs where the market could potentially even cover several hundred dollars of upside in a short period of time.

 

The recent forecast by Bank of America for gold to hit $3000 per ounce is not only looking increasingly plausible but also more likely.

Risk Appetite Sinking

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The gold market is slightly higher today as investors again shed stocks and risk appetite shrinks. In mid-am action, the benchmark Dow Jones Industrial Average is down by nearly 200 points as investors consider the ongoing spread of COVID-19 and the recent Berkshire Hathaway move that saw the company dump all its airline holdings.

 

As if the continuing spread of COVID-19 and the economic difficulties surrounding it are not enough, tensions between the U.S. and China have been on the rise. The U.S. has stepped up its rhetoric placing blame on China for delayed reporting about the Coronavirus outbreak at its early stages in February. The increase in U.S./China tensions could potentially affect the trade agreement the two sides finally made in January, and President Trump could even look to implement fresh tariffs in the near future.

 

As some U.S. states look to open back up following weeks of lockdown, the potential for another wave of COVID-19 must be considered. Some states, such as Georgia, are opening back up but not following federal guidelines to do so. As states look to get business going again, the next few weeks could be critical for both the virus and the economy.

 

If states reopen and the virus remains on a downward trajectory, with cases declining, it could help fuel a recovery that could possibly send stocks higher. On the other hand, however, is what stocks may do if states reopen and are forced to close again due to an increase in virus expansion. That situation could potentially be catastrophic and could cause negative economic effects that could take years to mend.

 

The ongoing uncertainty over the virus and global economy could keep a bid in gold and other perceived safe haven assets. If the yellow metal is able to hold above the $1700 level, then a strike at $1800 would seem logical in the weeks ahead. With little chart resistance ahead of the market, a move to $1800 and beyond could set the table for a challenge of previous all-time highs near $2000 per ounce. An upside breakout into fresh all-time high territory could see the price of gold move dramatically higher and do so very quickly.

 

As the U.S. Federal Reserve and other global central banks take steps to try to protect their respective economies as well as the global economy, the threat of inflation could be on the rise in the years ahead. The U.S. Fed has already cut rates to zero again, while also implementing unlimited QE. Fed Chief Jerome Powell recently suggested that the central bank is not concerned about the deficit during emergency times such as what is currently being seen, and that mentality could spike severe inflation unlike what has been some in some time.

 

The ongoing threat of rising inflation, global recession and geopolitical uncertainties may keep the gold market on the offensive in the months and years ahead. Such an outlook may fuel buying in gold on any significant dips, as well as buyers stepping into the market on strength.