A Tough Start

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The gold market is certainly getting the new trading week off to a lousy start as the yellow metal is down nearly $70 per ounce in mid-a.m. trade. Other markets are not holding up much better, as the key stock indices including the Dow Jones Industrial Average and the tech-heavy Nasdaq are also seeing declines of around 2% or more in early action.

 

The U.S. markets are reportedly reacting to a rise in European cases of COVID-19 and have joined the global equity sell-off to start the week. A lack of fresh stimulus measures from Washington is also playing a role as well as reports of major global banks continuing to do business with individuals suspected of wrongdoing.

 

The concern over European viral cases has fueled speculation that further, restrictive measures may be introduced to stem the spread of the virus. Any closures of bars and restaurants, public meeting places and other businesses could cause the global recovery to sputter at a time when central banks are already pulling out all the stops to keep the economy going.

 

In other news, U.S. Supreme Court Justice Ruth Bader Ginsburg passed away over the weekend, and that has led to an increasingly hostile batter over her successor. The need to name a successor to Ginsburg will almost certainly complicate an already bitter presidential election battle that could also muddy the waters for any further stimulus measures to come out of Washington any time soon.

 

The concern over the viral pandemic today has given the U.S. Dollar Index a boost, and that dollar strength is likely playing a major role on gold’s downside today. The yellow metal is trading just under the $1900 mark at $1897. The bulls will attempt to hold prices at $1900 or higher before the market closes today. If they are unable to do so and the metal closes below the $1900 level, it could potentially lead to further selling tomorrow and in the sessions ahead that could test the will of the gold bulls. Today’s sell-off could, however, prove to be an excellent opportunity to buy the dip.

 

Nothing has changed from a fundamental standpoint between last week and today. The markets appear to be suffering from a case of the “sell everythings” today that could see an ugly close to stocks at 4pm EST this afternoon.

 

With 43 days left until the U.S. Presidential election, investors taking some money off the table should come as no surprise. The election is likely to become a major issue for markets in the days and weeks ahead. If the election results are contested, it could wreak havoc across financial markets while potentially fueling investor interest in perceived safe haven assets such as gold. Rising viral numbers, rising hard Brexit risks and the uncertainty surrounding the presidential election could all play a role in the shift to a “risk-off” mentality in the weeks ahead, and that mindset could remain in place through the election until a winner is officially declared.

Sideways For Now

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The gold market is likely seeing some pullback after recent gains as the yellow metal gears up for another run towards fresh all-time highs. The metal has traded largely sideways for a few weeks now, and the longer it moves sideways the more significant the next leg higher could potentially be.

 

It is difficult, if even possible, to come up with any bearish issues for the gold market and the metal is likely to continue to be bought aggressively on any dips in price that do develop. The Fed’s recent decision to allow inflation to run above its desired 2% target means that interest rates will stay low for some time to come. This ultra-low interest rate environment is bullish for gold, which tends to outperform as rates decrease.

 

The stock market could hold the key to the yellow metal’s next rally. Stocks have been strong in recent action as investors have become increasingly dependent on central bank action to keep equities on the offensive. Despite the Federal Reserve holding rates at zero and pumping the economy full of liquidity through QE, however, a day may come when investors recognize and acknowledge the difficulties being faced by the global economy. This recognition could potentially lead to a major pullback in equity markets, which currently sit near all-time highs. Such a pullback in stocks could send additional capital flowing into the gold market and other asset classes and could lead to fresh all-time highs for the yellow metal.

 

The Federal Reserve’s actions could keep ongoing pressure on the U.S. Dollar as well. The dollar index has struggled to maintain any upside above the 93 level, and the euro could have further room to run higher against the greenback. A weaker dollar index could keep buying pressure in gold elevated, as the weaker currency makes gold less expensive for foreign buyers.

 

The combination of a slowing global economy, weaker dollar, accommodative Federal Reserve and uncertainty over the upcoming U.S. Presidential election may all keep the yellow metal rising while limiting any downside dips in price. The gold bulls are in control of the market on the daily chart, with an uptrend still in place that has lasted the last five months or so. The bulls will target the September highs near $2000 per ounce, while the bears are likely to target support at $1900 per ounce.

 

Despite all the bullish issues backing the gold market currently, there are some other factors that could lead to a pullback or even reversal in trend. Hopes for a COVID-19 vaccine have intensified in recent days and have fueled the stock market’s upside. If a vaccine is developed and is brought to market, it could potentially provide a shock-and- awe effect on global markets that would likely send stocks higher and safe haven asset classes lower.

 

The major theme for the week is the U.S. Federal Reserve meeting set to conclude on Wednesday afternoon. The announcement on rates will be followed by a press conference with Fed Chief Jerome Powell who may provide additional clues on the central bank’s plans and thinking.

Focus to Stock Market

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The story on Tuesday must be about stocks, which are again getting hammered as the markets have reopened following the Labor Day Holiday long weekend. The tech route is still underway, and the tech-heavy Nasdaq is down around 3% in mid-morning trade.

 

The metals complex has thus far not seen much interest or drive either way, and prices for both gold and silver are slightly lower in mid-morning action. Some key outside markets for the metals complex, including crude oil and the dollar index, are moving against the metals in early action. Dollar strength and crude weakness may, however, not be enough to prevent a rise in gold and silver today of the sell-off in equities gathers further steam.

 

The gold market has a variety of issues to contemplate and the next several weeks could see rising market volatility across asset classes. Not only do the gold bulls have to consider the current viral pandemic and economic slowdown, they also must consider the potential effects of central bank policies, price action in the dollar and the upcoming U.S. presidential election. These factors could make some significant waves in the weeks ahead before possibly finding a crescendo of sorts after the presidential election.

 

The primary drivers of stronger gold, including uncertainty over the viral pandemic and easing policies by global central banks, are likely to keep the yellow metal well-supported in the weeks and months ahead. While it is extremely likely, if not certain, that the Fed and central banks will continue to ease, the outcome of the presidential election is far less certain. A Trump victory could keep stocks on the offensive, with the dollar also continuing to trend lower. A Biden victory, however, could potentially ignite a significant sell-off in equities and risk assets and could also pave the way for higher gold.

 

The ECB will be meeting on Thursday of this week, and it is widely expected that the central bank will continue on its path of money printing and easy policy in order to fight the slowing effects of the COVID-19 pandemic. The U.S. Federal Reserve is scheduled to meet next week and is likely to do the same. A very dovish U.S. Fed could fuel a sharp rally in gold prices that could see the market hit new all-time highs and beyond. Any surprises from the Fed, on the other hand, could fuel a sharp sell-off in the gold market and could alter policy expectations for the months ahead. Although any hawkish talk from the Fed is very unlikely at this point, the gold market may see heightened volatility heading into the announcement and following it.

The gold bulls have maintained the upper hand on the daily chart and remain in control of the market from a technical standpoint. The market appears to have already shook out the “weak” longs, and that may prevent any further pullbacks of significance. The bears are likely to target the $1900 level on the downside, while the bulls will look to take price above the September highs near $2000.

Bulls Look to Regain Control

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The gold market is slightly higher in early Monday action as the bulls look to regain control of the market. The market has quite possibly entered a longer consolidation phase in which prices remain mostly sideways for an extended period. A downturn in risk aversion is also having an effect, as investors look past the raging viral pandemic and hope for a credible vaccine to be brought to market sooner rather than later. Whether a vaccine is discovered or not, it remains unlikely that nations will enter into another full-scale lockdown to combat the spread of the virus.

 

Outside markets for gold today are in a bullish posture. Crude oil is moving higher, near $43.50 per barrel, while the U.S. Dollar index moves lower, maintaining price action near a two-year low. The weaker dollar has likely been a major contributor to gold’s upside in recent months, and a further downside breakdown in the greenback could set the stage for a significant run higher in gold, silver and other metals.

 

The dollar certainly has a variety of forces working against it currently. Not only is the U.S. way, way in debt, but the Federal Reserve is now keeping interest rates at zero once again, while printing an unlimited amount of dollars through QE. Although a weaker dollar may benefit the government as it pertains to debt payments, it is not beneficial to the average American or user of the currency. As the dollar declines in value, it tanks more and more of them to purchase everyday goods and services. This fuels the effect of making things increasingly expensive, eroding discretionary incomes in the process. Not only that, but even net investment returns are eroded as they cannot escape the negative effects of a weaker dollar.

 

As Americans and users of the dollar feel the pinch from a decline in value, it can have a significant, negative impact on the economy as a whole. As everyday goods and services become increasingly expensive, people will begin to look to save money, spending less in the process. This downturn in spending can weigh heavily on the economy, as the economy is primarily driven by consumer spending. This reduction in household spending can, in turn, lead to an economic recession if severe enough.

 

Not only is the greenback being forced to deal with the negativity of zero percent rates and QE, but it must now also contend with a change in the Fed’s thinking. Last week, the central bank announced that it would shift its inflation mandate and would look to see inflation rise above its desired 2% target for a period of time. Rising inflation, combined with all the other bearish dollar issues, could be enough to send the greenback on a fresh and significant leg lower. This dollar downside could fuel a sharp rise in some dollar-denominated asset classes, including gold and silver, and could become the primary catalyst for $3000 or $5000 per ounce gold prices.