Global Appetite for Risk

/in , /by

The gold market continues to take its cues from the stock market and global appetite for risk. As stocks rallied sharply on Wednesday, the yellow metal took a dive, dropping by nearly $30 per ounce to $1699. The decline took the metal below the significant $1700 level and could point to further weakness ahead.

 

The reading on the jobs market today by ADP may have been behind some of the selling in gold. According to ADP, the U.S. private sector shed some 2.76 million jobs in May. Although that is a very large figure, it is significantly smaller than the forecast of some nine million jobs lost and set the stage for a rally in stocks and a decline in perceived safe haven assets. Revised ADP data said that some 20 million jobs were last in April during the height of the COVID-19 pandemic as the economy essentially ground to a halt.

 

Wednesday’s ADP jobs data may lend some support to Friday’s non-farm payrolls report. Before getting overly optimistic, however, it is important to understand that these two labor reports have not always been on the same track. Today’s ADP data may not, therefore, be considered an accurate predictor of Friday’s non-farm payrolls report. Consensus estimates are looking for a decline in non-farm payrolls of around eight million. A miss on Friday could set the stage for a significant stock reversal, while a better than expected figure could pave the way for even more equity upside. The tech-heavy Nasdaq is within striking distance of its all-time highs and could see those highs exceeded with another strong day or two. The benchmark S&P 500 and Dow Jones are also not far behind and could potentially see a test of previous highs in the coming weeks.

 

As stocks move higher, pressure could continue to mount on the gold market. Although the yellow metal would seemingly have everything it needs working in its favor, a stubbornly bullish stock market could stand in the way of a test of previous all-time highs near $2000 per ounce.

 

Recent protests and rioting in the U.S. could be the next major catalyst for gold and stock markets. Protests have been going on for over a week now after the death of an unarmed African American man at the hands of a white Minneapolis Policeman. Protests have at times turned into riots. Major cities such as New York City, Chicago, Los Angeles and Washington D.C. have all seen significant criminal activities in recent days. Widespread property damage and looting have been seen in addition to fires being set. Police have, thus far, appeared to be patient and understanding of protestors. That could change, however, as the days drag on and violence increases.

 

The uncertainties surrounding the COVID-19 virus and ongoing racial protests could keep buying interest in gold elevated. In what could be a double whammy, the protests could lead to another rapid outbreak of COVID infections and a return to previous lockdown guidelines.

Equities on a Tear

/in , /by

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

/in , /by

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

/in , /by

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.

A Quiet Start

/in , /by

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

/in , /by

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

/in , /by

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.

Strong Start

/in , /by

The trading week has gotten off to a strong start for equity investors. On Monday, the benchmark Dow Jones Industrial Average gained nearly 700 points for a gain of over 3% for the day. The question many investors may now be asking is whether recent gains might last.

 

As the world continues to deal with the coronavirus pandemic, the total amount of infections continues to rise. It is estimated by many analysts, in fact, that infections may not peek for several weeks still. U.S. President Trump even recently reversed course, ordering the shutdown to continue to April 30th. Trump had recently voiced his desire for the country to reopen by Easter.

 

Many companies announced employee furloughs today in a move that was not unexpected. How many of these companies might survive the pandemic remains a larger question, as many of them may not be able to last much longer.

 

On Friday, the U.S. Government passed legislation aimed at combatting the coronavirus crisis. The government passed a $2 trillion bill that would put money into the hands of most Americans. This is designed to keep people spending, as the transfer of money may keep the economy above water for a bit longer. Over $150 billion of the bill will go directly into healthcare, finding its way into drugs, equipment and other arenas that desperately need help. The massive stimulus package comes on the heels of the Federal Reserve’s latest action, as the central bank recently took its Fed Funds rate back to zero.

 

Despite recent actions, however, the stock market may still find a fresh low before a long-term bottom is found. On Monday, the benchmark 10-year treasury note yielded just .64 percent, suggesting that risk aversion is still quite prevalent in the marketplace. This degree of risk aversion could point to still higher gold prices in the weeks and months ahead. The gold market ended lower Monday as stocks roared higher, although the yellow metal was only down a few dollars per ounce, not straying far from recent highs.

 

Also having a negative impact on gold Monday were a dollar index rally and weaker crude oil. The oil market, which has been on a sharp trajectory lower in recent weeks, sank below the psychologically important $20 per barrel level. Crude is now trading at levels not seen since 2002, and the world is rapidly running out of storage areas for the commodity.

 

In other news, the Russian Central Bank said it plans to put its gold purchases on hold starting April 1st. The Russians have been a major buyer of gold in recent years, adding to their holdings every month for the last three years. Despite their not purchasing gold, the Russian Central Bank is unlikely to become a seller any time soon. The country is currently engaged in a crude oil price war with Saudi Arabia and in a world of ultra-low interest rates may look to maintain its gold holdings to support the value of its currency.

 

The next several weeks may see ongoing or even increasing market volatility across asset classes, and the gold market could potentially be en route to a fresh high and even a test of previous all-time highs near $2000 per ounce.

Cluelessness

/in , /by

A reporter on Bloomberg earlier in the week commented that fear was not yet present in the markets. Global stocks have seen enormous selling pressure, but it is not until the hedges and safe-haven assets also trade lower simultaneously that fear is then present. In other words, everything is red. Certainly there may be a degree of subjectivity to that call, but I like the premise.

In this selloff/correction/decline, we witnessed that for the first time on Wednesday the Dow Jones Industrial Average and the TSX officially entered bear market territory (which is a 20% decline from their most recent high). The S&P500 joined them Thursday. On Wednesday, the price of the US 10 Year Treasury was also lower. Whether that’s anomalous or warning it could get worse is to be seen. The most challenging angle to this entire market action though, which is exemplified by the quick and drastic price moves, is deciphering this as a transitory shock or a recession incurring serious economic damage to consumer confidence and employment.

In just a week, consensus shifted to the latter.

I had written a blog last Sunday morning to be sent out at the beginning of the week, but for the above reason the piece was rendered irrelevant by the time the markets opened. The topic was on distinguishing the signals the markets were telling us. Particularly whether the bond market was pricing in rates cuts or a more extreme scenario including recession. The second point was on then being careful with the parallels that were being drawn to 2008. Beyond analyzing the virus impact, there is now an oil supply-shock entering the equation.

Numerous unknowns remain. Front and centre are the potential spread of this virus and the associated impact to economic activity. Trying to determine this almost seems like a rogue’s game at this point. Many of the more opportunistic analysts suggested that this health scare was no less manageable than previous pandemics (from an economic perspective) and the markets would see past it. But, the probabilistic scenarios still seem wide ranging, as illustrated by stock markets struggling to maintain a bid. Factoring in the destabilising effect of the energy shock to the credit markets and the effect on the real economy is whats driving the increasing concerns with recession.

To add to my obsolete (and unpublished) content, one key distinction worth making to 2008 and the Global Financial Crisis is the abandonment of multilateralism. Beyond whatever one’s preferred politics, it seems President Trump’s global led shift to a more unilateral approach seems less effective, or alternatively an audience less receptive. In 2008, it was a coordinated effort between monetary and fiscal stimulus to support the global economy. This last couple weeks has seen a communique from G7 nations that saw central banks follow in an uncoordinated fashion that is yet to see any effect.

The concern is that this deglobalization affect will create more dislocations and more market fragility. Without Western Powers acting in sync, there is the opportunity for more frictions and much more volatility. To illustrate this, Goldman Sachs Wednesday morning suggested the S&P500 could fall another 15%, but then rebound into year end by 30%. Buckle up.

A Long Week Ahead

/in , /by

If market action on Monday is any indication, the trading week could be a long one. As global markets grapple with the rapid spread of the coronavirus, the markets are now being hit with an oil market sell-off the likes of which has not been seen since the Gulf War. After an OPEC deal failure over the weekend, the price of crude oil plunged by up to 30 percent on Monday as nervous investors hit the sell button.

 

The situation in oil began to develop last week. As OPEC looked to its allies to strike a deal on production cuts, Russia declined to accept a deal. This, in turn, likely caused Saudi Arabia to slash the price it charges for its oil as it looks to increase production. On Saturday, the Kingdom announced significant discounts on April selling prices. The Kingdom also is reportedly looking to ramp up production to over 10 million barrels per day, from its current production level of 9.7 million barrels per day. Some analysts have suggested that the Saudi Arabian/Russian price war began this weekend as Saudi Arabia initiated the largest price cut in over two decades.

 

The oil price war does not come at a good time for the market. Crude oil has already been under selling pressure as the coronavirus spreads and becomes an increasingly significant focal point for global markets. Adding insult to injury, not only was a production cut agreement not reached going forward, but current cuts are set to expire at the end of the month with no direction going forward. Exporters may, therefore, be able to decide how much oil they pump.

 

The oil price war, combined with concerns over coronavirus, has sent stocks sharply lower Monday. The benchmark Dow Jones Industrial Average has been down over 2000 points at the lows of the day, while all U.S. Treasury yield are now below 1 percent.

 

After trading over $30 per ounce higher in action last night following the market’s open, the price of gold has settled back down. The yellow metal is trading $1.70 higher in early afternoon action. The rise and subsequent decline of gold in recent hours may be attributed to concerns over the health of the Chinese economy, the globe’s second largest. The yellow metal may also find willing sellers as the need to raise cash increases due to market volatility and margin calls.

 

The decline in global equity markets could have a way to go. Although central banks stand ready to cut rates further or to implement other measures such as QE, the risks of an oil price war and the coronavirus cannot be overstated. U.S. equity markets are in correction territory already, and a rapid move towards bear market territory could be seen in the days and weeks ahead. Monday marks the 11th anniversary of the U.S. stock bull market, yet many are now questioning whether the run higher is over.

 

The gold market, on the other hand, could be at the beginning stages of a bull market that could last for years. Despite the metal’s reversal from overnight highs, gold could stand to benefit if stocks move lower and risk aversion rises further.