The Week Ahead in Gold

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The gold market is looking to finish the week on the strong side, with prices up nearly $40 per ounce in mid-morning action on Friday. The day’s gains are more than enough to offset declines seen on Thursday, which featured very wild and volatile price action as Fed Chairman Jerome Powell spoke in Jackson Hole, Wyoming.

 

The gold bulls are focused on the inflation trade again, and many may now feel that U.S. interest rates are set to remain very low for an extended period of time. This ultra-low rate scenario plus other ongoing issues could set the stage for a significant rise in inflationary pressures combined with slower economic growth. Under such conditions, the path for gold could be sharply higher and the market could test or rise above the $3000 per ounce level in short order.

 

Nothing has changed in the bigger picture, despite the decline seen in the yellow metal yesterday. In fact, global central banks remain fully committed to keeping their foot on the gas pedal and the global marketplace is likely to remain flooded with stimulus for some time to come. Central bank stimulus measures could remain in place until the end of next year, possibly longer, and could potentially stoke inflationary pressures down the road.

 

The Fed is now targeting higher inflation rates, as the inflation rate has consistently undershot the desired 2% target for years now. The new Fed policy could have serious complications, however, if it is not carefully crafted and then communicated to U.S. businesses and households. The Fed’s plans could, however, end up slowing economic growth rather than boosting it. Overall, the central bank appears to be very reluctant to raise rates again and it could avoid doing so for years.

 

The next Fed meeting is scheduled for September 16th and could be a powder keg. It is the last FOMC meeting before the presidential election, and it could provide more clarity about the central bank’s plans going forward. A very dovish Fed, for example, could propel gold sharply higher into fresh all-time highs, while putting further downside pressure on the dollar. Whatever the case may be, investors will be looking for further clarity on the Fed’s plans after this week’s Jackson Hole symposium. That clarity could set the stage for trade across a variety of asset classes for months or even years to come.

 

Of course, there remains the crowd of market participants that will question how the Fed’s actions, or lack thereof, may affect gold and the markets. After all, a decade or more of low interest rates and massive QE has yet to spur inflation, so what makes investors confident that the central bank will be able to create it now?

 

The United States has gotten away with it so far, and there is little reason to believe it will not continue to do so, at least for now. What if the U.S. allows inflation to get too hot, however?

 

These are questions and issues that will be debated for some time to come. Although it is unclear exactly how things may play out in the months and years ahead, current monetary policy would seem to suggest that higher gold prices are not only likely but are inevitable.

Maintaining Its Strength

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The gold market has maintained strength, despite a recent pullback in price, and appears to be getting ready for another run to the upside. The yellow metal has several important issues currently working in its favor, including unlimited quantitative easing measures and the potential for a sharply slower economy as the COVID-19 pandemic rages on.

 

The gold market does appear to be getting quite comfortable above the psychologically important $2000 per ounce level, and it may simply be a short period of time and consolidation before the bulls stage another rapid run to the upside.

 

The weaker U.S. Dollar has been a primary catalyst for higher gold prices and could continue to serve as a key driver of investor demand. On Tuesday, the dollar traded down to a two-year low. The dollar’s weakness has been attributed to a few factors, but lower bond yields are likely the main catalyst for greenback downside. The U.S. Dollar index is getting dangerously close to falling below support levels. A decline below the May 2018 low around 92.24 could see the currency fall further, possibly reaching a swing low around the April 2018 low at 89.22.

 

Not only does the U.S. currency have to deal with ultra-low interest rates and unlimited quantitative easing, it must also deal with ongoing delays on the passage of additional U.S. stimulus measures. Delays to further stimulus could set the stage for a significantly slower third quarter in U.S. economic activity, and that weakness could keep downside pressure on the greenback.

 

As the dollar weakens, gold may also be seeing benefit from rising tensions between the U.S. and China, who happen to be the globe’s first and second-largest economies. The ongoing Coronavirus crisis has led to anger and distrust between the two superpowers and could even lead to a complete halt to trading negotiations. If talks were to be discontinued, the global stock market could potentially see significant selling, like what was seen months ago as COVID fears took hold, and gold could rise as additional investors seek out its perceived safety.

 

As if COVID-19, a slowing global economy and a worsening of U.S. and Chinese relations were not enough, the U.S. also has an upcoming presidential election that could send markets into a tailspin. It has been suggested by some that if democratic candidate Joe Biden were to win the presidency, stock markets could see a massive potential sell-off as investors look to go risk-off. It has also been suggested that a Trump victory could set the stage for fresh all-time highs in equities, despite the effects of the global pandemic. What many likely fear the most, however, is the uncertainty that could arrive with an election result that is contested. If Trump refuses to leave office, for example, the unknowns could fuel a sharp and significant decline in equity and risk asset prices. Much of that equity could, however, find its way into the yellow metal, driving prices further into all-time high territory.

Breakout Above $2000

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The gold market has continued to exhibit strength in recent trade even as stocks have been buoyant. It seems as if many investors now understand what is happening in the global economy and marketplace and are looking to plan ahead for a major economic slowdown and rising inflation.

 

The gold market stands firmly above the $2000 level after Tuesday’s trade, and any significant dips in the metal are likely to be bought aggressively. The combination of a slower economy, pandemic, zero-percent interest rates and unlimited money printing are all fueling gold’s rise. These factors may continue to fuel upside in the yellow metal for months and years to come, as the potential effects of the latest round of ultra-low interest rates and QE may not be felt for some time.

 

Tuesday saw some wild swings in the gold market. An explosion in Beirut initially gave gold an upside lift. Once it was determined, however, that the explosion was a fireworks storage facility located next to a factory, the price of gold fell by about $9 per ounce. That dip was bought, however, as many traders and investors are searching desperately for opportunities to enter the market on the long side. With today’s new all-time high of over $2024 per ounce, the market could have significant, further upside to cover before the rally starts to get winded. Some analysts Tuesday suggested that another $200 per ounce of upside is likely before the buying slows down.

 

Although some may suggest that the gold market is already overbought, the market’s technical indicators do not suggest an overbought condition, at least not yet. $2200 per ounce could very well be the next target for the bulls, who have little to no reason not to be aggressive buyers. Ultra-low yields along with a weaker dollar index are also considered bullish for gold, and if recent trends continue, the yellow metal could be gearing up for a sharp and significant run higher. With no upside chart resistance to bank on, those looking to short the market could find themselves being forced to cover their positions and cover them quickly. This short covering may lead to even higher prices for a rally that does not appear to have run its course as of yet.

 

The gold market appears strong, yes, and it may take a lot to knock it off its pedestal. That being said, the yellow metal could be vulnerable to an end to the current COVID-19 pandemic if a vaccine is proven and brought to market. The quickly approaching U.S. Presidential election may also play a role in gold’s future. It has been suggested that a Democratic victory by challenger Joe Biden could upset financial markets and bring stocks lower and do so in short order. A Trump victory, on the other hand, is seen by many as being supportive of financial markets.

 

With so many current unknowns that must be considered by investors, markets may see less movement heading into the election in November. As the uncertainty piles up, however, an increasing number of investors may seek out the perceived safety of previous metals as a hedge.