The Tax Man May Cometh

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The stock market declined on Thursday as news hit the wires concerning Biden tax proposals. The Dow Jones Industrial Average declined by over 300 points, while the tech-heavy Nasdaq lost nearly 1% on the day.

 

The equity plunge on Thursday begs the question of how stock markets may react to a more aggressive tax policy by the new administration. Some analysts suggested, however, that if aggressive tax legislation had a chance at being passed, the market would have dived by thousands of points, not hundreds.

 

The threat of the tax man is likely to become an increasing focal point or markets in the months ahead. Although the idea of higher tax rates can seem daunting and is unliked by most, if not all citizens, the higher tax rates are likely to only affect a few of the wealthiest Americans and corporations. As far as markets are concerned, it is a case of not k knowing that may be far worse than the actual legislation that is eventually proposed. That not knowing could fuel market volatility and could end up driving buying in precious metals as investors seek out a perceived safe haven for their capital.

 

Thursday’s equity performance could very well be the tip of the iceberg when it comes to fear based selling. Markets have continued their ascent for some time now, with little standing in the way of higher stock prices. The threat of the tax man could be the primary catalyst to end the current equity bull market and fuel an about face in markets. If that proves to be the case, the gold and metals markets could stand to benefit significantly.

 

The gold market has been range bound for some time now and could be just waiting for the next major catalyst to fuel a breakout in either direction. The bulls have bought up any significant dips to the bottom of the trading range while the bears have thus far limited any sustainable upside. Things could be set to change, however, if the bulls are able to maintain trade above the $1800 level on a closing basis. That level could hold the key to higher gold, while the $1700 area below could set the stage for a fresh leg lower.

 

The metals have benefited from a weaker dollar, easy monetary policies and other factors in recent months. Given the current geopolitical and economic backdrop, it is difficult to imagine a scenario in which gold does not continue its ascent to the upside. These factors, combined with rising inflation and the threat of an equity market reversal, should be enough to drive gold back to all-time highs or beyond. Good things often take time, however, and the recent sideways action in gold could be indicative of a brewing breakout that may come at any point.

 

A stock market reversal or collapse could be the final straw for the gold bulls. Such rice action could pave the way for sharply higher gold and could set the stage for fresh all-time highs to be made in the weeks or months ahead.

Yields Retreat and Dollar Declines

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The gold market could be gearing up for further upside in the week ahead. The beginning of Q2 has brought with it dollar weakness and an easing of treasury yields which are both bullish for the yellow metal. The retreat in yields and the greenback could continue, and any further declines in these assets could keep the gold bulls moving the market higher.

 

The drop in yields below the psychologically important 1.60% level has fueled buying in gold and could continue to boost investor optimism in the class. The yield breakdown has allowed spot gold to move above its 50-day simple moving average for the first time in months. This turn higher in the moving average could keep shorter-term traders and speculators looking for market entries. This momentum play could keep the metal on the offensive and it could potentially target ist 100-day moving average in the short term, around the $1809 level.

 

With increasing concern over inflation and many feeling that gold has yet to reflect the rising price risk in its price, the market could certainly have significant room to run higher. If the 100-day moving average is taken out in the week or weeks ahead, the bulls could stage a raid rally higher back to previous all-time highs or beyond.

 

The Federal Reserve is set to start its media blackout period this week ahead of its next policy announcement on April 28th. The lack of any Fed speakers could keep a degree of pressure on the dollar and thus could keep some upside momentum going in the yellow metal.

 

Before any sustainable move higher is made for gold, however, the market may want to feel more comfortable that the recent rise in treasury yields is contained. This could mean that the Fed will be battling the market on their respective inflationary outlooks. The Fed does not appear worried about inflation currently, although the market appears to be seeing increasing worries over the potential for a rapid rise in prices and may feel the Fed is already behind the curve.

 

Nothing further will be known about the Fed and its plans until the end of the month. The central bank is unlikely to make any changes currently, however,  and its language is likely to remain largely the same if not completely the same. The Fed will almost certainly hold its current line of keeping rates at or near zero while also pumping the economy with capital through current QE operations. At some point, the Fed may fuel a rise in inflation but that rise appears to be down the road and not of current concern.

In the meantime, gold investors will continue to monitor the economic recovery as well as the ongoing vaccination campaign. Any trouble in the vaccination campaign could set the stage for a major risk-off period that could see stocks tumble rapidly while perceived safe haven assets such as gold draw buyers. If, on the other hand, the campaign runs smoothly, hopes for an end to the pandemic could keep risk appetite elevated and stocks running higher.

Big Week Ahead

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The gold market is off to a slow start as the new trading weeks gets underway. Gold prices are down realy $12 per ounce in early Monday action, while silver also struggles and is down nearly $.50 per ounce.

 

With little economic data to digest today, markets are taking a pause ahead of a busy week ahead. The notion of rising inflation remains at the center of investors’ attention, along with the rapid and sharp rise seen in bond yields.

 

Yesterday, Fed Chairman Jerome Powell appeared on the widely watched television program “60 Minutes” to discuss his views on the economy and monetary policy. Despite the fact that Powell reiterated the Fed’s stance will remain the same for some time and that rates are not going anywhere anytime soon, the markets do not appear to be very interested in his commentary today.

 

The threat of inflation remains very real and could be the next major market driver. China, the globe’s second-largest economy, recently said that it is considering implementing price controls to get a hold of rising commodity prices. The Chinese Central Bank also reportedly wants to tighten lending standards in what some may view as another step to combat rising inflation.

 

Regardless of what China may or may not do, the U.S. appears to be quite comfortable standing pat for the time being, even if inflationary pressures do see a further spike. An easing Fed combined with rising inflation should help propel gold and other metals higher, and the recent downtrend in the yellow metal may prove to be nothing more than a pullback within a larger trend higher.

 

The bears still maintain control of the daily price chart. The bears have, however, apparently lost momentum as prices have been unable to make a fresh leg lower. If the bulls are able to sustain a decent price rally in the days ahead, it could confirm a double bottom on the daily chart and the trend could see a switch and reverse higher. The bulls will likely target resistance in the $1800 area, while the bears will look to break prices down below support in the $1700 region.

 

The higher inflation risks that have been covered well by the financial media in recent weeks may not yet be effectively priced into the gold market. According to Standard Chartered, the gold market has yet to price in those risks. The gold market appears to be lagging behind other major markets which have already begun to shift their postures toward rising inflationary risks.

 

Gold certainly has room to move higher, even significantly higher from recent levels. The gold market is seeing some competition from other asset classes as an inflation hedge, however, and that competition could keep a lid on any rallies in the near-term. Cryptocurrencies have likely taken part of the gold crowd away from the metals markets as Bitcoin has hit almost $60,000 in a wild trend higher. With the price of gold trading in strong correlation to yields and the dollar, it may take more time for the yellow metal to come around and rise on inflationary pressure.

A Sluggish Start

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The gold market kicked off the new trading week on a sluggish note, declining by some $22 per ounce in late afternoon trade. The yellow metal was likely falling victim to chart based selling that gave investors reason to hit the sell button. Of particular note Monday was gold and silver’s ignorance of a risk-off scenario in the markets. The failure of the metals to catch a bid in early action Monday could be a warning signal to bulls and may suggest that additional bearish pressure could be on the horizon.

The story of the day is the margin calls being experienced by Archegos Capital Management. The firm reportedly dumped some $30 billion in holdings late last week and that move could have been due to being overleveraged. The major concern was for the potential of contagion in the markets. Thus far, however, markets have shown little interest in the scenario and any contagion effect appears to be limited, if existing at all.

That could change, however, and any signs of market contagion have the potential to light a fire under gold and silver. Worries over a more damaging effect could send bids into the precious metals space immediately as investors look to escape the potential carnage.

In other news, investors are looking forward to the Biden Administration’s release of its next economic plans, due to be unveiled Wednesday. The first of two sections of the administration’s agenda, the proposal could reportedly cost several trillion dollars and may also include a substantial amount of new tax revenues. It is unclear what effect, if any, the proposal may have on the metals markets. Any significant uptick in spending without the means to pay for that spending could pressure the dollar and drive buying in the metals as a hedge, however.

A big plus for the gold market in recent years has been the global move away from the U.S. Dollar. That move appears to be ongoing. The Russian National Wealth Fund recently announced its intention to move into gold. The move likely has something to do with Russia’s de-dollarization efforts which have been ongoing for several years now. The Russian central bank stated in January that its gold holdings had finally surpassed its dollar holdings. The central bank has reportedly purchased over 200 tonnes of gold on average per year since 2014 with the exception of last year’s smaller total.

The dollar did, however, hit a four-month high today as worries over the hedge fund default took hold. The Dollar Index is now at the highest level since November 2020 and could potentially be poised for further upside. Any additional gains may weigh on the gold market, while a reversal lower could set the stage for stronger gold and metals prices. With today’s poor showing, the bears are again in control on the daily chart and may look to expand the downtrend that has been in place several weeks now.

Bond Yields, Cryptos, and Gold

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The gold market is off to a slow start Monday morning. Stable bond yields and stronger stocks are both taking a toll on the yellow metal which is down over $7 per ounce in early action. Some fresh chart based selling is also being seen today as the bears look to build upon their current technical advantage on the daily chart.

 

This week, investors are likely to remain focused on bond yields and may also pay attention to economic data set for release. The gold bulls may be on the lookout for any weaker than expected data or other issues that could point to the Fed keeping its foot on the gas pedal. The central bank did recently reiterate its views on rates, stating that it would hold rates steady around current levels for some time to come, despite the threat of rising inflation. The central bank’s credibility is always in question, however, and investors would likely feel better seeing more reasons for the Fed to hold rates steady.

 

Amid rising bond yields, an economy that is recovering and a very accommodating Federal Reserve, the rise in Bitcoin and cryptocurrencies is also becoming the subject of more speculation and discussion. Bitcoin is valued today at nearly $60,000 per unit. As its price grows, so seemingly does the interest in the currency.

 

Fed Chairman Jerome Powell is discussing cryptocurrencies today, suggesting that the asset class is “substitute for gold, not U.S. Dollar.” Several leading global central banks have, in fact, suggested that they are not threatened by cryptocurrencies at all. The crypto market volatility seems to be a major stepping stone for these currencies to become more widely used and accepted, and that volatility does not appear ready to subside any time soon. Despite cryptocurrency drawbacks, however, this market may continue to compete with gold and other asset classes as a store of value and protector of wealth.

 

A further rise in cryptocurrency prices may keep any rallies in gold limited. Despite any potential rise in currency values, however, the gold market still has numerous reasons to move higher. The combination of easy monetary policies, rising inflationary pressures and dollar weakness could all keep a bid going in the gold market for the foreseeable future. A sudden dollar reversal or change to monetary policies could, however, deflate interest in gold and cause a fresh wave of selling to enter the market, taking prices lower in the process.

 

The bears still have the technical advantage on the daily chart and will look to build momentum with further downside. The nine-week old downtrend on the daily chart was negated last week, however, and the bulls could have the potential for a market reversal in the days ahead. The bulls will need to take out key resistance in the $1775 area before getting overly excited and could target the $1800 region in the days ahead. On the downside, the bears will target the March lows around $1673. A breakdown below this level, on a closing basis, could set the stage for a fresh wave of selling that could potentially see prices hit sub-$1600 levels.

The Fed Has Spoken

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The U.S. Federal Reserve made no changes to monetary policy today as expected. The central bank did, however, increase both its growth and inflation outlooks. The Fed reiterated that interest rates are not going anywhere anytime soon, and that no increases will be seen prior to the end of 2023.

 

The potential for rates to remain at zero for another couple of years has injected buying interest in the yellow metal today, and gold has now pushed into positive territory following the Fed announcement. Although the Fed has suggested that growth and inflation are likely to pick up more steam, it also cited some key issues that could potentially pit a damper on things going forward. The Fed cited the ongoing viral pandemic as a major contributor to overall economic activity and said that it poses a major risk to the economic outlook.

 

The rate of inflation forecast by the Fed may now exceed its desired 2% annual target. Recent projections suggest that price pressures could rise by as much as 2.4% by the end of the year before falling back towards 2%. The rapid rise in inflationary pressure could keep gold and other hard assets well supported in the months ahead, despite the potential for strong equity market performance.

 

The Fed appears ready and willing to follow through on its previously discussed plans to allow inflation to run a bit “hot” before raising rates to slow things down. The notion of ultra-low rates with a weaker dollar and massive stimulus spending may give more investors reason to consider gold in the near future, especially in the face of rising inflation.

 

Fed Chairman Jerome Powell will be giving a news conference following today’s decision on interest rates. No major surprises are expected, and Powell is likely to continue to telegraph the fact that the economic recovery remains far below the pace necessary for the central bank to consider any changes to policy. Powell may even forcefully argue that any ideas of a rate hike are premature as he looks to lay out the central banks plans and thinking to the investing public.

 

The U.S. Dollar Index has lost ground after the announcement. The dollar weakening could be a sign of more downside to come. Further dollar weakness could pave the way for sharply higher gold, silver and metals prices. With no rate increases likely being seen unti at least 2024, it is difficult to imagine a scenario in which the dollar strengthens dramatically from recent levels. A downtrend in the dollar could keep upwards pressure on the gold market while providing key support for the yellow metal.

 

The bears still maintain control of the market on the daily chart. The bulls will likely make a push towards resistance in the $1750 area this week, and a breakout above this area could set the stage for a further rally. The Fed has apparently set the table for higher gold prices in the months ahead. Dinner may now be on the way.

Under Pressure Again

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The gold market is under pressure Monday as the new trading week gets underway. The yellow metal is seeing some selling enter the market as it is forced to compete with other asset classes. Rising bond yields coupled with a stronger U.S. Dollar Index is giving investors pause and a reason to hit the “sell” button today.

 

The benchmark U.S. 10-year note is yielding around 1.62% early Monday afternoon. This key treasury contract has been seeing a steady climb in its yield. That ascension has investors worried, and higher yields may not only negatively affect the price of gold but may also have a bearish influence on stocks. Although the current currency yield itself may not be a cause for concern, the steep uptrend in yields could be indicative of rising inflationary pressures or worries about the Federal Reserve’s plans going forward. Whatever the case may be, treasury yields are worth watching and gold investors will likely pay close attention to yields in the weeks and months ahead.

 

The dollar has hit a 3.5 month high and has been trending higher in recent action as well. Currently sitting at 92 and change, the Dollar Index could potentially make its way towards the 94 region before finding more serious selling pressure. The greenback is currently benefiting from stock weakness and the recent passage of Biden’s $1.9 trillion stimulus package.

 

Geopolitical risks may be on the rise, however, and have the potential to provide a much needed boost for gold and metals. Over the weekend, Houthi rebels staged a drone attack on Saudi Arabian oil facilities that led to a rise in crude. The oil market hit over $67 per barrel before backing off on profit taking. The situation is also likely to be closely monitored by global investors, as any further escalation has the potential to affect global oil supplies running out of the Persian Gulf region.

 

Recent Chinese economic data would seemingly suggest that the globe’s second-largest economy is running at full speed. Overnight, China reported that both imports and exports rose sharply above expectations. Further positive economic news from China may keep gold supported as it could be indicative of stronger metals demand from China.

 

The gold market is in a downtrend on the daily chart and prices stooped to a 10-month low today. The question now becomes how much lower might they go? The $1600 may seem like a far ways off, but the market could reach that price point within days. Strong technical support in the region could keep the yellow metal from falling any further, however, and the bulls could become increasingly aggressive on any moves lower. The bulls, on the other hand, will likely target resistance in the $1750 area as a first step. The market is really in no man’s land at current levels and the next several sessions could dictate whether the bulls or bears control the metal for the foreseeable future.

Is Inflation Really A Problem?

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The idea of rising inflationary pressures has taken a large chunk of market attention in recent months. At first glance, the threat of inflation seemingly makes sense. Rising bond yields, higher crude oil prices and other factors have fed the notion that a period of rapid inflation could be on the way.

 

The idea of entering an inflationary environment comes at a time when the Federal Reserve is looking at adding additional stimulus measures to battle the ongoing COVID-19 pandemic. The idea of further government spending to help Americans hurting from the pandemic has some analysts concerned that too much free money floating around is likely to add fuel to the inflationary fire and boost prices.

 

Not only have rising price pressures, such as that seen in crude oil, pressured inflationary worries to the upside, but the rapid rise in key treasury product yields has also served to give investors cause for concern. The benchmark 10-year note yield, for example, has quickly risen from sub-1% levels to its current level around 1.5%. This move higher did not happen overnight, however it did seem to take place quickly and would seemingly suggest that higher prices could be on the way.

 

Fed Chairman Jerome Powell threw some needed water on the fire today as he spoke at the Wall Street Journal Jobs Summit. Powell suggested that while prices have been on the rise, that rise is transitory and is likely a one-time event. The central bank’s long-term inflation objective remains at 2%, and currently inflation is running well below that level. The Fed has also reiterated several times that it plans on allowing inflation to run a bit hot before it even considers removing accommodation.

 

Powell’s commentary today could be viewed in one of two lights for gold. Some may view the idea of a lack of inflation as allowing the Fed to keep rates ultra-low for longer. Others may view it as being bearish for gold as it suggests that the Fed has still been unable to make any significant economic changes.

 

The gold bears seemed to have the upper hand today, as gold declined below the key $1700 level following his comments. The drop below this area could potentially set the stage for a larger decline as it may draw bulls out of the market, causing them to effectively throw in the towel. Today’s declines in gold come shortly after the “taper tantrum” of late February fueled selling in bullion that took prices down over $114 per ounce for the month.

 

The reality, however, is that the Fed can only do one of two things going forward: It can begin to taper (which could drive yields up substantially in a short period of time) or it can stay the course. Given the risks associated with a rapid, large rise in rates, the Fed will almost certainly do nothing for some time. This should allow the bullish gold narrative to remain intact despite some bumps and bruises.

Gold verse the Dollar

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The gold market is seeing some buyers step in this week as the Dollar Index comes under renewed pressure. In addition to the weaker dollar on Tuesday, gold also likely got a bounce higher from stronger crude oil which traded over $60 per barrel Tuesday.

 

The gold market has continued to hold off recent selling pressure, however, it remains unclear how long the market may be able to stem the tide of willing sellers. After hitting a nine-month low overnight, the gold market saw a mild corrective bounce higher. The yellow metal has been hampered of late, as dollar weakness has subsided and as stock markets have continued to march higher. The benchmark 10-year U.S. Treasury yield now stands around 1.44%. A slight decline in yields sent stocks roaring higher on Monday, although many analysts seemingly believe the recent ascent in yields could continue.

 

The topic of potential inflation has been a mainstay in financial media for weeks now. Overnight, data from the Euro Zone showed an inflation reading of up .9% after a January reading of .9% higher. Although inflation has seen a slight climb according to some key data points, it remains quite far from the levels associated with being problematic. Inflation data later in the year may become more telling, as it would paint a better picture of global economies that are starting to run hot.

 

The Fed is also likely to continue to play a key role in gold’s fortunes. The central bank recently suggested that it plans on keeping its easy money policies in place, despite the potential for an inflationary battle. The recent rise in yields was seeming to suggest the Fed could begin to tighten sooner than expected. The Fed has, however, quelled that notion as it looks to get more Americans back to work. The labor market may hold the key to when the Fed reverses course, and the central bank is likely to take extra caution before tightening too soon in order to make sure as many Americans benefit as possible. Inflation is still running below the Fed’s desired 2% annual target as well, and the Fed will likely want to see inflation run at or above 2% for a period of time before it starts to tighten policy. The idea of an accommodating central bank may keep the gold market and other hard assets in play for the foreseeable future.

 

Make no mistake, however, the gold bulls do have their work cut out for them. The market remains dangerously close to near-term support. A breach below recent support could set the stage for a significant leg lower that has the potential to wipe out any bullishness in one swift stroke. A breakdown below the $1700 could trigger a large wave of selling that could drag the market sharply lower.

 

The bulls on the other hand, have their eyes set on a close above the $1800 level. A solid close above this area could fuel further buying interest in the market as traders and momentum players look to jump on the bandwagon.

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.