Gold Sees Slight Rally On Short Covering

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The gold market is seeing some minor buying activity as shorts look to cover some positions. The yellow metal is still quite a ways from the $1800 level, however, and may remain vulnerable to further selling pressure. Even with the Fed shakeup this week, the metal is still not seeing much of a bid and that could keep the sellers highly motivated. Markets are also significantly calmer today compared to yesterday when the equity markets saw a major slide.

 

The clock is ticking on the U.S. Government funding. The funding is set to run dry Thursday evening at midnight, and if not extended, could lead to a partial government shutdown beginning on Friday. Thursday is also the day on which the House of Representatives will vote on the Biden infrastructure plan, making it a potentially market moving day.

 

Rising bond yields have been a major factor in recent market volatility. The benchmark 10-year Treasury is yielding some 1.50% today. A further steep rise in yields is possibly on the horizon, and if it does come to fruition, stocks and risk assets could see additional volatility and possibly selling. The rise in yields may not only affect stocks and risk assets, but it may also have additional, bearish effects on the gold market.

 

The dollar hit an 11-month high overnight. Dollar strength is also likely having an impact on the gold market and additional upside for the currency could spell trouble for the gold bulls. As the prospects of tapering from the Fed close in, the dollar could continue to ascend with renewed vigor. Earlier than anticipated rate hikes from the central bank could also keep the currency bulls on the offensive. The gold market would likely struggle further with additional dollar strength and the currency could be a major key holder for the market’s prospects in the months and year ahead.

 

The bears maintain control of gold on the daily chart. The market is now in the midst of a three-week downtrend on the chart. The bears will next target the $1700 level on a closing basis. The bulls, on the other hand, still need to take out resistance in the $1800 region followed by the mid 1830s. A failure of gold to take out these areas on a closing basis will keep the bears in control for the time being. The gold market may now be pushed lower to the early August flash crash lows and with little buying support could exceed those levels on the downside.

 

Despite gold’s recent lackluster performance, the market still has numerous reasons to be a buyer, especially for the long-term. A debt ceiling debacle for example, could send gold sharply and rapidly higher if the government is forced to shut down due to a lack of funding. The long-term prospects for the dollar and U.S. fiscal situation also remain very bearish. Whatever the case may be, the gold market may end up rewarding the patient, long-term investor while punishing the short-term trader or investor. A gold investment should, therefore, be made only with the long-term in focus.

Focusing On The Long-Term

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The gold market remains weak today following a variety of data that could allow the Fed to move forward with its tapering plans this year. Despite the rise in weekly jobless claims today of 16,000, yesterday’s Fed meeting is being viewed in a more hawkish light today and that is likely the primary culprit behind the selling in gold today.

 

Risk appetite is ticking higher today as worries over the threat of an Evergrande contagion seem to be diminishing. Evergrande has an $83 million interest payment due to be made today, and although it is unclear if that payment has been made, many seemingly believe that the Chinese Government will not allow Evergrande to fail. The lack of contagion could pave the way for stocks to continue their march higher, while causing a decline in the desire for perceived safe haven assets such as gold.

 

The Federal Reserve did also allude yesterday to the possibility of it raising the key interest rate sometime next year. Any rate hikes would almost certainly not occur before the security purchase tapering has been completed. The notion does, however, indicate that the Fed may be feeling good about economic prospects and may look to move quickly in order to contain inflation.

 

Inflation has already become a problem. Although the Fed has said it believes that inflationary pressures may be “transitory” in nature, there simply is no telling how high inflation could get before the Fed takes action. As is usually the case, the central bank may also already be a step behind the curve and could even be unable to quell inflation through traditional changes to monetary policy. Whatever the Fed does, markets are likely to become upset as the era of free money disappears. That could lead to a widespread rotation of assets that could see a dramatic decline in stocks as alternatives such as gold receive those funds en masse.

 

Big changes are on the way. When these changes start to occur, the current investor mindset will change significantly. As investors begin to exit and even shun stocks and risk assets, they may have nowhere to turn to other than physical gold. Bullion could see a rapid and significant rise in value that could put it out of reach of many investors. This means that now is the time to get involved, right now.

 

Adding gold to your portfolio has never been easier than it is today and it may never be cheaper. With gold currently trading for less than $1800 per ounce, the price of gold today could prove in the long-term to be a rock bottom bargain basement deal. If you want to secure your financial future while protecting your portfolio from inflation and dollar weakness, now is the time to act.

 

All of the current Fed discussions are nothing but noise. The most successful investors just learn to ignore the noise and remain focused on the long-term. This “forest through the trees” approach may keep you on the right side of the markets while decreasing portfolio volatility and anxiety along the way.

Can Gold Hold Its Gains

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The gold market is trying to hold onto some gains following a hectic day yesterday. The markets do appear to remain nervous, however, stocks are in the green (for now anyway) and there seems to be calmer heads prevailing today.

 

Chinese markets remain closed today for a holiday. Property developer Evergrande remains the center of attention, however, and has an interest payment due on Thursday of over $83 million dollars. Although Evergrande is reportedly on the verge of default, some now believe that the Chinese Government is likely to step in to prevent a default. A bailout may only occur, however, if the government determines the widespread risk of default as being a risk to the nation’s economy.

 

Against the backdrop of Evergrande and increasing risk aversion, the Federal Reserve will begin its two day policy meeting today. The meeting will end tomorrow afternoon with the Fed’s announcement on policy and a press conference hosted by Chairman Jerome Powell. The sell-off seen yesterday is unlikely to cause any changes in the Fed’s plans, although it may have some influence on the decision. Powell will be forced to answer questions in the post announcement press conference, and markets may be particularly interested in the timing of any tapering the central bank may enact as well as its thoughts on inflation.

 

The Fed and its plans have been a major input for gold and will continue to act as such. The central bank now finds itself in an impossible position and it will be interesting to see how it attempts to normalize monetary policy after so many years of ultra-low rates and stimulus measures. The central bank seems to now find itself in a damned if it does damned it it doesn’t position.

 

The gold bulls will look to take prices back above previous resistance in the $1800 area. Without a breakout above this level on a closing basis, the bears will attempt to take prices lower, possibly even down towards the $1650 region. A significant push by the bears could, at this point, cause remaining bulls to throw in the towel and fuel a sharp price decline in the process. Despite some recent bearish forces, the gold market still has numerous bullish issues working in its favor. Inflation, stimulus measures and other issues may all be viewed as being bullish for gold and could keep the market from falling much further.

 

The bulls must, however, get something going to the upside or risk falling off. The lack of an upside breakout in recent months has frustrated the bulls, and any further lack of upside could be the market’s undoing. Resistance in the mid $1830s remains a major target. Without a breakout above this area, the bulls could find themselves fighting an avalanche of willing sellers on any significant rallies. While neither the bulls nor the bears are in form control on the daily chart, the market has turned from being bullish to being more range bound. This could mean that prices stay within this range for an extended period.

Central Banks Still Buying

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Recent data from the World Gold  Council suggests that global central banks remain strong buyers of gold. Global central banks added just over 30 tons in July to their holdings, a figure that was inline with net purchases the month before. Gross purchases for July tallied some 34.3 tons, while net purchases for June had totalled some 63.1 tons.

 

Despite July’s lower net purchase figure, the data does point to a continuation of a trend in central bank buying. Large purchases were made by several emerging market central banks, including Brazil, Thailand and Hungary. These bigger buys are not likely to be repeated, however, and could put purchase figures more on track with the longer-term trend.

 

Total gold sales were significantly lower compared to June. Only some 4.2 tons were sold for the month, with only Qatar and Poland showing meaningful declines in their gold reserves.

 

All in all, the data seems to suggest that central banks remain positive on the gold market and that more buying could continue. Gold’s recent declines have not been viewed as a negative by central banks either, but rather may have been viewed as a positive buying opportunity to purchase the yellow metal “on sale.”

 

Central banks look to buy and hold gold for several reasons. The yellow metal can provide portfolio stability for central banks while also adding needed credibility to their respective currencies. Gold can be an excellent means of diversifying a portfolio and central banks also need this diversification for their large holdings.

 

In the current global environment of weakening fiat currencies ,rising sovereign debt and other geopolitical risks, owning a large allocation in gold has likely never been more important. With the U.S. Dollar at increasing risk of losing its spot as the global reserve currency of choice, central banks may look to gold, considered by some to be the only true form of money, as an alternative.

 

The global importance of gold may just now be starting to be more thoroughly understood. As demand for gold rises further in the months and years ahead, prices stand to rise and rise substantially. After making new all-time highs last year over $2000 per ounce, the market has pulled back significantly. Currently valued at just over $1800 per ounce, the yellow metal has taken its time digesting last year’s upside. The key, however, may lie in the fact that any substantial declines in gold have been aggressively purchased by traders as well as long-term investors. With long-term players willing to step in and buy the dips, the future for gold looks very bright indeed.

 

The bulls remain in control of the daily chart and will look to take out resistance in the $1830-$1840 region on a closing basis. The bears, on the other hand, will look to take prices down to the $1775 area. Central bank buying could, in the meantime, provide the bulls with additional support and reasons to buy, boosting prices along the way.

Key Outside Markets Playing a Role Ahead

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The gold market is off to a quiet start as the new trading week gets underway. As the unofficial last week of summer gets started, markets will be looking forward to the return of training volumes and potential volatility.

 

The market has seemingly digested last week’s Fed commentary from the symposium held in Wyoming. While some Fed officials gave hawkish commentary, Fed Chairman Jerome Powell’s comments were not viewed as being overly hawkish. Powell did allude to the central bank beginning to taper its asset purchases this year, although he stopped short of saying rates could rise and seemingly suggested that the Fed is in no hurry at all to begin tightening its key interest rate.

 

The markets will also continue to monitor the evacuation in Kabul as well as weather in the South. Over the weekend, Louisiana and Mississippi were pounded by Hurricane Ida. The storm has left New Orleans without power and the total damage remains unclear. The evacuation of Kabul will continue as the deadline approaches, and any further violence in the region could set the stage for increasing risk aversion and a flight to safety. Markets seem content, however, as the last week of summer gets going before the long Labor Day Weekend. Markets will also look forward to Friday’s release of the latest employment report which could be a major catalyst for or against Fed tapering this year.

 

As market action unfolds this week, key outside markets may also play a role in price action. The Dollar Index is moving lower in early trade today while crude oil is also moving lower. These two markets could play a major role in gold’s upside in the weeks ahead. Dollar weakness may feed inflationary fears and the desire for assets that may hold value while the currency declines. Stronger crude oil, on the other hand, may also fuel fears of rising inflation and cause potential buyers to consider gold.

 

The gold bulls remain in control of the market on the daily chart. The bulls have taken the market back above the $1800 level and held it for several days now. The next upside objective is to take price above the July highs in the $1830-$1840 region on a closing basis. The bears, on the other hand, will look to take prices down below key support in the $1775 region.

 

The gold market certainly has several key factors working in its favor and the market could be gearing up for a major run higher. It will require some cooperation, however, from outside markets and possibly the Fed. A major decline in crypto currencies could also fuel gold buying and potentially give the market reason to head higher on a sustainable trajectory. Whatever the case may be, the bulls will likely buy any dips in the market until proven otherwise. Bullish price action could see the market test resistance in the days or weeks ahead, and if it is taken out on a closing basis, the market could have ample room to run higher.

The Importance of Gold With Inflation

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The gold bulls have always suggested that the yellow metal is a must have during periods of heightened inflationary pressures. Some have even called gold the ultimate hedge against inflation and the yellow metal has certainly seen some strong buying interest in recent months as inflationary pressures in the U.S. have perked up quite a bit.

 

The question though, is what makes gold an effective hedge against inflation? Does the metal perform some type of magic that instantly erases inflation or its effects? Does gold suddenly make inflation non-problematic? Of course not. The gold coins and bars that are bought on a widespread basis in fact have no magic nor do they perform any tricks, not in the literal sense of the word anyway.

 

The “magic” that gold does have, however, is simply its ability to maintain its purchasing power and to rise in price as the prices of everyday goods and services rise. Gold, in fact, can hold its value as it rises alongside everything else during periods of heightened inflation. A paper dollar, on the other hand, will lose much of its value during such periods as each dollar will then buy less and less goods and services. Put simply, that is the difference between gold and silver during inflationary periods.

 

It is also the exact reason that you must hold physical gold if you want to survive bouts or rampant inflation.

 

The story of inflation in the U.S. has been an interesting one. Until this year, the Federal Reserve has been unable to create inflation despite its many rounds of QE and its holding of interest rates at or near zero. For years, the Fed was unable to spur any price pressures. Now, finally, the central bank may have achieved part of its objectives. Growing inflation means a growing economy, and the economy has shown strong signs of recovery even from the ongoing Covid-19 pandemic. This recovery phase is now being called into question, however, as the Fed symposium this week in Wyoming may provide clues about the Fed’s intentions to begin removing stimulus measures. The debate about what the Fed may or may not do is ongoing, and will continue even after the symposium this week.

 

Whatever the central bank decides or does not decide to do, there are plenty of other reasons to also own gold. Dollar weakness, geopolitical uncertainty and a potential top in stocks are all good reasons for investors to consider alternative asset classes such as gold. Considered by many to be the only true form of money left on the planet, the value of gold is likely to rise further, in fact much further, as it becomes increasingly desirable for investors.

 

The case for ongoing inflation remains unclear. Whether prices rise further or not, however, is not the primary reason to consider a large allocation in physical gold. If you take an objective look at the global economy, Fed policies and sovereign debt issues, you will likely determine that gold is a must have for your portfolio. Now may be the ideal time to start acquiring it too, as recent price levels may not be seen again once the yellow metal takes off.

Data Seen As Bullish for Gold

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The gold bulls are putting some significant distance between prices and the $1800 level today. Following the release of the latest reading on second quarter GDP, which as well below expectations, the bulls have given themselves the green light to buy. The yellow metal now sits at over $1830 per ounce and could be gearing up for a more sustained attempt higher.

 

The weaker than expected GDP data may serve to underscore the Fed and its desire to hold policy steady. Although the headline data was a bi of a disappointment, it was not bad. With a savings rate of nearly 11%, consumers still have ample capital laying around that could be out to work, driving growth higher and sustaining the economic recovery.

 

As investors and markets sift through today’s GDP data, they are also still digesting yesterday’s Fed meeting announcement and commentary. Although the initial commentary from the central bank may have been viewed as being slightly less dovish, by the end of the day the markets appeared to be pleased with the Fed and its remarks. Even if the Fed does begin to taper its bond purchases later this year, it seems to be in no hurry at all to begin raising interest rates. The central bank’s willingness for accommodation may last several more years, in fact, and could keep pressure on the Dollar Index along the way. The dollar is seeing some selling activity today as it moves lower while

yields are stable at the 1.27% area.

 

In addition to the weaker GDP figures, markets may also be reacting today to slower housing data. The latest figures on pending home sales showed a decline of 1.9% in June. This drop may have caught the markets off-guard as consensus estimates were looking for a gain of .3%. The decline in pending home sales may be due in large part to the rapid rise in home prices that has been seen in recent months. Some buyers may be electing to take a wait and see approach rather than risk overpaying for a home. As record high prices weigh on consumer sentiment, it could eventually lead to a market reversal as the market slows further. The housing sector is watched closely and could affect the Fed and its decision making. If the sector slows further, it may pave the way for the Fed to remain highly accommodating which could keep stocks moving higher and the dollar moving lower. Any ongoing continuation of easy monetary policies could keep the gold bulls on the offensive as well and could set the stage for a challenge of previous all-time highs in the months ahead.

 

A move beyond previous all-time highs on a closing basis could drive further buying in gold that could take the market sharply higher in little time. With no upside chart resistance above the highs, any substantial buying activity could fuel a rapid run higher in value that could see the yellow metal hit $3000 or even $5000 per ounce in short order.

Fed To Keep Foot To Pedal For Now

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The U.S. Federal Reserve announced today that it plans to keep its foot on the gas pedal, maintaining its current rate policy along with its monthly security purchases. The central bank did, however, allude to tapering back its support in the months ahead if the economy continues to strengthen.

 

The Fed will keep the key interest rate at 0-.25% while it also continues to purchase $120 billion per month in securities. The Fed’s post meeting announcement, however, suggested the central bank could potentially look to dial back stimulus measures sooner than anticipated if the economy shows further improvement. The Fed stated it believes the economy has made improvements towards its employment and price stability goals, and that it would continue to assess this progress in the meetings ahead.

 

Central bankers will be gathering in a few weeks at the annual symposium held in Jackson Hole, Wyoming. It is expected that at this meeting, the Fed may provide further clarity on its plans and the timing thereof. The Fed’s commentary today could be viewed as the first shot across the bow for the central bank scaling back its monthly bond purchases, or QE. The central bank talked but promised nothing, allowing it to maintain its flexibility concerning policy if things were to change in the weeks or months ahead.

 

The ongoing viral pandemic is likely the biggest influence on the Fed. The Delta variant of the virus has been spreading quickly and has caused concern among investors. Vaccination progress may alleviate some of the concerns, however, the virus remains a very potent economic player.

 

The Fed is not only having to battle the virus, but is also having to contend with higher inflation. The threat of rising price pressures could force the Fed to make changes to monetary policy earlier than hoped for. If the Fed feels the need to raise rates earlier than expected, it could have serious consequences for the global economic recovery. The next several months could be very tedious for central bankers as markets could see rising volatility and selling enter the picture.

 

The gold market is back firmly above the $1800 level in late afternoon trade Wednesday. The market appears to not be paying much attention to the Fed commentary as the central bank did not announce anything new. The bulls may be seeing this as a green light to buy, however, as the Fed appears to want to keep policy steady. The next few trading sessions will tell us how the bulls feel following the Fed and if there are any major concerns over premature Fed action. The gold bulls will need to put some distance between current prices and the $1800 level in order to alleviate near-term vulnerability. A breakdown below this level in the days ahead could potentially signal a larger breakdown on the horizon and could send the bulls scrambling for the exits.

 

Against the current backdrop of heightened inflation, easy monetary policies and dollar weakness, it may be difficult for the bears to stage a market assault sufficient to take prices below the recent trading range. The bulls will need to step up soon, however, in order to avoid a test of the range bottom.

Look Out Below

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The Fed will be forced at some point to raise interest rates. When the central bank does, it could become a crisis of mega proportions as the amount of money required to service the nation’s massive debt equals nearly one third of the country’s annual budget.

 

Markets are awaiting the Fed meeting this week and looking forward to hearing commentary from Chairman Jerome Powell following the decision on Wednesday. Rising inflation worries, a potential economic slowdown and the resurgence of the viral pandemic are just a few of the issues at hand the Fed must contend with. The central bank may now find itself in an impossible situation, however, and markets may scream bloody murder when the Fed finally decides to take its foot off the gas pedal.

 

The primary risk of the Fed electing to hike interest rates is that the changes will be made on the short end of the curve, but will also affect costs which will become unaffordable. The argument could be made for the U.S. issuing longer-term bonds, possibly 100 or even 500 year bonds, but

it is not. The focus on refinancing on the short end of the curve will eventually lead to a crisis as interest costs rise and become unsustainable.

 

Rather than suddenly deciding to begin hiking interest rates, however, the Fed may be more likely to announce a tapering of its monthly security purchases, or QE. The Fed is still buying mortgage-backed securities, and that is an asset class that could be the first to be cut. The housing market is on fire right now, so one has to ask the question of why the Fed feels the need to juice that market.

 

Whichever way the Fed decides to go, it will likely not be pretty. The stock market has been making fresh all-time highs for some time now, arguably on the back of artificially low interest rates and QE. Once the central bank removes the punchbowl, it is difficult to say how markets may react but the possibility of a large meltdown exists. Given the run up in equity markets over the last several years, the decline in stocks could be swift and severe, possibly even nastier than the drop seen in 2008-2009.

 

A sharp decline in equity markets could set the stage for sharply higher gold as investors seek out alternatives. Against the current backdrop of economic and geopolitical challenges, a weaker dollar and the viral pandemic, investors may become increasingly interested in asset classes with a reputation of reliability. With its long history as a reliable store of wealth and protector of value, investors may find no better alternative to turn to than gold.

 

The countdown to action by the Fed has already begun. Some Fed members have already suggested the central bank begin tapering its asset purchases sooner rather than later, and calls for the Fed to begin hiking rates may increase as inflationary pressures mount further. The next several months could see increasing market volatility as investors attempt to figure out the Fed’s plans, and that volatility could lead many market participants into the gold market.

 

The Fed’s actions may not only affect stocks and other markets, but may also put pressure on the dollar as well. Dollar weakness is a major factor for the gold market, and any further downside in the greenback could keep buying interest in gold elevated.

Basel III Effects on Gold

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Sometimes the rules work in your favor. That is expected to be the case as the rollout of Basel III takes place in Europe and Britain. The European rollout is set to take place at the end of the month, while the British rollout will not go into effect until January.

 

To understand how these regulations may be bullish for gold, it is important to understand what they are and their intentions. Basel III is effectively a set of regulations for bank capital, stress testing and market liquidity. Although many of these guidelines were introduced following the financial crisis of 2008/2009, many aspects of the guidelines are only being rolled out this year.

 

Basel III will make gold a risk-free asset, while making unallocated gold more expensive to transact. This would seemingly make it wise to purchase physical gold, with substantial rewards awaiting those that do. Making gold a risk-free asset may strongly encourage central banks to buy more, as it may serve to balance their books.

 

The decision to make gold risk-free was not made recently. It is a decision that goes back to 2017, a year in which central bank gold buying hit a record of over 650 tons. The massive 2017 gold buying may serve as an illustration of how the risk-free status may cause additional buying of the metal, and a new record could very well be seen in the year ahead.

 

One of the most interesting aspects of Basel III is the fact that it does not classify gold as a commodity but rather a currency. This would seemingly suggest the opinion of gold has shifted, and that it is viewed as less of a risky and volatile instrument but as more of a stable form of money. This makes a lot of sense, given the fact that some believe gold is the last true form of money that exists.

 

With central banks essentially being given the green light to load up further on gold, there may be little standing in the way of dramatically higher gold prices in the months and years ahead. If global central banks (the most powerful financial institutions on Earth) see reason to buy and hold physical gold, shouldn’t you?

 

The most recent Basel regulations seem to underscore what we and other bullion fans have been saying for a long, long time. The gold market is not simply a commodity and not simply an “asset.” The yellow metal serves a very important purpose. Gold, unlike fiat currencies, can maintain its value over time. Unlike fiat money, it cannot be manipulated (creating more out of thin air), and it is of finite supply. As the Federal Reserve and global central banks continue to ruin their respective currencies, gold may be the last man standing. That makes now the time to start planning ahead. The protection of your financial future depends on taking action, and that action has never been as important as it is now.

 

Every single dollar you currently own and every investment you have that is dollar- denominated is likely to lose significant value in the years ahead. If the thought of paying $8 for a gallon of milk or $6 for a loaf of bread frightens you, then you need to carefully consider how your life may be affected if the dollar drops in value substantially. In our view, it is not a question of “if” but rather “when.”