Equity Weakness Fuels Metals Demand

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The gold market kicked off the new trading week on a strong note Monday. Spot gold prices gained nearly $26 per ounce as a combination of short covering and bargain hunting fueled buying interest in the metal.

 

The price of gold hit a multi-month low on Friday. The weakness to end last week provided bulls with a strong reason to buy today as key outside markets also showed cooperation towards gold and helped the yellow metal gain ground. Stock weakness, especially earlier in the session, also lent a hand. The story for gold investors and traders this week remains the same: Inflation and rising bond yields.

 

The benchmark 10-year treasury note fetched a yield of 1.369% today, hitting a one-year high. Although the 10-year yield has been trending higher in recent weeks, some analysts have suggested that the rate would need to hit 4% before the note could really begin to compete with technology stocks for investor attention. Rising yields could be viewed as inflationary, however, and that inflationary outlook is what may have investors troubled. The talk of accelerating inflation comes at a time when the U.S. Government is looking to roll out a massive stimulus bill that could further fuel rising prices.

 

The threat of inflation is not just a U.S. problem, either. Several nations, including the U.S., Europe, China and the U.K. , will begin to roll out their own respective environmental initiatives. As the central banks of these areas take action, the flood of capital could quickly become excessive while fueling a rapid and significant rise in the prices of goods and services.

 

Regarding monetary policy, U.S. Federal Reserve Chairman Jerome Powell is scheduled to speak to the Senate Banking committee on Tuesday. Investors and markets may pay close attention to Powell’s commentary as they look for clues as to the central bank’s plans and thinking.

 

A weaker dollar and higher crude oil prices also supported gold on Monday. Higher crude prices are yet another possible symptom of rising inflation and may be watched closely by investors.

 

In other news, the Central Bank of Russia has continued its accumulation of gold. The bank reportedly added more bullion to its reserves and its holdings of gold have surpassed its dollar position. This trend could become increasingly important as a growing number of nations look to establish trade outside of the greenback in the months and years ahead. The dollar is clearly under a degree of pressure as the global reserve currency of choice, and if the dollar loses its top position it could send the value of the currency spiraling lower. Further dollar weakness could boost gold further, possibly fueling a return to previous all-time highs or beyond.

 

Although Monday’s strong showing was certainly helpful, the bears still have control of the daily chart and the multi-week downtrend that has developed. The bulls next target may be a close above resistance around the $1850 level. The bears will target the $1800 level and last week’s lows near $1760.

An Alternative to Cash

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The gold market may see continued buying interest on Tuesday as the trading week gets underway. Monday saw little action as U.S. markets were closed in observance of the Presidents Day Holiday. As traders and investors return, the focus for markets is likely to be centered around equity markets, the threat of rising inflation and monetary policy.

 

The big news over the last several days is without a doubt, the acquittal of former President Donald Trump. Although the vote carried significantly more “guilty” votes than “not-guilty,” the senate still lacked the necessary two-thirds majority required by law for a conviction. The biggest question now is how might Trump look to remain heavily involved in Republican politics. Of course, time will tell how Trump will play his cards. In the meantime, however, the government and even some Republicans will try to figure out how to move on in his absence.

 

One of the major issues that the Trump administration dealt with is energy independence and the need for domestic oil. The Biden administration has already placed a moratorium on new oil and gas leases and drilling permits in a move that could potentially send the price of oil higher. Crude oil futures for March delivery have recently breached the $60 per barrel level on the upside. This higher price of crude oil could be indicative of rising inflationary pressures that could send the cost of everyday goods and services sharply higher.

 

Not only have oil and some other markets provided possible clues as to rising inflation, but the massive stimulus package currently being discussed by U.S.leaders could also fuel rising prices even in the face of the ongoing viral pandemic.Treasury Secretary Janet Yellen, a former Fed Chairwoman, recently suggested in an interview that the stimulus bill carries with it the risk of inflation, but that the risk of not doing enough to fight the pandemic is greater. Although significant inflation could be and likely is a ways off still at this point, the more it is discussed the more that investors may seek out perceived safe haven asset classes to hedge their risk. The threat of rising inflation, now or down the road, could keep investors turning to alternative asset classes such as gold to mitigate their inflation risk, especially if the dollar weakens further.

 

Gold’s allure as an alternative monetary asset is not limited to investors, either. The state of Idaho recently approved a bill that would allow the state to hold physical gold or silver as a means of hedging inflation and a debased currency. The House Bill 7, as it is known, will now head to the state Senate for another vote after receiving widespread backing in the House. The Senate could meet as early as this week to begin discussing the legislation.

 

The gold bulls have been patient, but their patience could eventually lead to downside in the market if there is a lack of upside for the bulls to get excited about. With the market currently sitting around the $1818 area, the bears will look for a close under $1800 while the bulls may need to see a close above $1900 before getting more aggressive.

The Week Ahead in Gold

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The gold market started the week off on the right foot, gaining some ground as the silver market exploded upwards to an eight-year high. The silver market topped out in the overnight session at over $30 per ounce before giving back much of the gains during the day session.

The short squeeze being seen in silver is a theme that could be seen throughout the year. As an increasing number of social media platform users look for shorts to squeeze in various markets, the number of sharply rising and volatile markets could also increase. The silver market garnered interest over the weekend as a group of traders discussed the market being run by the “big boys” of Wall Street. The sharp move higher in silver today comes shortly after the significant run up for Gamestop stock last week, which has been the talk of financial media for several days now. The Gamestop saga led to small, retail traders putting a massive squeeze on major hedge funds and large market players, causing some to lose tens of millions of dollars in the process. The “Reddit” traders have certainly given the markets something to think about. Hedge funds and major market players may now think twice before shorting stocks or other asset classes as the risk of a significant squeeze could be on the rise.

The silver market is not only benefitting from the short squeeze today, but may also have a significant tailwind behind it as investors keep an eye out for the inflation trade. The inflation trade could potentially fuel upside in the raw commodity sector as central banks keep their feet on the gas pedal to boost global economies as the viral pandemic continues to cause economic damage.

Surprising given the upside seen in gold and silver today, the dollar was also higher on the day. The U.S. Dollar index has been a major factor in recent gold and silver upside and further weakness in the currency could drive further buying in precious metals and other hard asset classes. As the U.S. Government looks to continue its recent monetary policies, including ultra-low interest rates and significant quantitative easing, the pressure on the dollar could remain or increase further. If the dollar were to break down further, it could find itself trading at levels not seen for years against other major currencies. Further dollar weakness could be the primary catalyst for higher metals and could fuel a rise to fresh all-time highs for gold in the months or years ahead.

The gold bulls have a slight advantage on the daily chart. The bulls will look to target a close above the key $1900 level in short order. The bears, on the other hand, may look to sell the market lower into the January lows just above the $1800 level. Against the current geopolitical and economic backdrop, it is difficult, if not impossible, to come up with any compelling reasons the gold and silver market may head lower. The path of least resistance remains higher until proven otherwise and any significant dips are likely to be bought aggressively.