The Week Ahead in Gold

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This week could be slower than last, as many investors avoid work, the markets and other responsibilities until the end of the holidays. The weaker dollar index likely played an important role in gold’s recent upside and could continue to do so.

 

The dollar weakness seen Monday was quite likely attributed to word that the U.S./China “phase 1” agreement would likely be signed sometime over the weekend. This initial agreement between the globe’s first and second-largest economies could potentially be a major step towards a viable, long-term commitment on trade. Few details have been released thus far, however, and it is unknown what concessions both sides will be making in order to make the deal work.

 

The idea of a U.S./Chinese deal being signed in the days ahead has reversed demand for risk-off assets, of which the dollar is part. If the U.S. and China appear to be seriously mending their trade relations, demand for dollars could see a significant decline as appetite for risk could rise. Although higher risk appetite could also weigh on gold, it could also ignite another reason for bullish investors to buy: Higher commodity demand from China and elsewhere could fuel a sharp rally in the yellow metal that could potentially see prices break out to the upside from recent highs. An upside breakout on the charts could, in turn, draw more buying interest into the market. A strong technical picture could take prices even higher in the process, possibly driving a rapid move towards previous all-time highs around $2000 per ounce.

 

Whatever the case may be, the gold market appears to have the pieces in place for a solid and sustainable run higher. What the primary catalyst may be, however, is still unknown. The bulls have maintained recent trade above the $1500 level and could look to take out previous highs in the $1550 region in the first sessions of the New Year.

 

In addition to ongoing U.S./China trade developments, the gold market has several other key issues that have the potential to drive the market sharply in both directions from recent levels. The ongoing Brexit saga could send waves through global financial markets, while another attack against Saudi oil could fuel a global crude scare and global recession. There is also the Trump impeachment to consider, although it appears to be quite unlikely that the U.S. Senate takes action against the President. Concerns over the next U.S. Presidential election could increase in the months ahead and could drive market volatility and selling in risk assets.

 

Whatever your outlook for the New Year may be, it is difficult to argue the notion that gold has several things working in its favor. If things calm down on the geopolitical scene and if stocks continue their run higher, there are still numerous, important reasons to buy and hold physical gold. As 2019 comes to an end and as the world gets ready to begin 2020, now is the time to keep your focus and approach on the long-term.

Clear as Mud

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As North American equity markets generally made their way higher in 2019 (with hiccups in May and August), it was against headwinds of caution and uncertainty. Geopolitical market risks were elevated with many examples making headlines throughout the year. Front and center were the Brexit delays and negotiations, and a lingering UK election (for the third time in five years). Tense ongoing trade negotiations between the US and China consistently sat in focus. This past week, however, provided a little more certainty for investors. It also leaves a lingering question of, what’s next?

In a busy week, we look to finally see the finish line for the CUSMA, which is the trade deal to replace NAFTA. As to US trade with China, there is an agreement in principle being cheered by the US President that avoids the costly tariffs that were set to directly impact American consumers. And across the Atlantic, it looks like the UK Tories were delivered their mandate to put an end to Brexit. In summary, some of the headline risks to the year have moved on to the next chapter.

Spend any time watching business news on CNBC or Bloomberg, the way to avoid any questions on the outlook for the markets is the link to uncertainty or unknowns. As we move forward, a modicum of that market uncertainty was definitively removed this week. With the UK election a textbook market reaction ensued. The Tories received their strongest show of support since the 1980’s, and the weakest result for Labour since World War II. Friday, the British Pound Sterling was as much as two and a half percent higher against the US dollar, with similar gains against the euro.

This move in the currency markets put the pound at its highest level against the US dollar in 19 months and its highest against the euro since the Brexit referendum back in 2016. In a quick digression, it was then we recall the pound fell 8 percent against the US dollar for the biggest one day move in a major currency since the end of Bretton Woods.

In the next chapter of uncertainties, we have the UK pending divorce and trade negotiations with the European Union over the next 11 months. Also, in focus could be a forthcoming trade deal with the United States in a global environment that sees a continued trend of deglobalization associated with declining global trade volumes. The other obvious uncertainty of course is the next phase of negotiations to take place between the United States and China.

With regards to the United States and China, shortly following the announcement of Phase 1 of a deal are reports of skepticism and calls for details of which trade barriers will be removed. The overzealous reaction in the risk and commodity markets was pared back as it seems the details that have come forward are clear as mud.

There is the angle that this past week may give the equity markets a strong footing into the year-end, but skepticism also lingers for what lies ahead.

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The Week Ahead in Gold

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The gold market is slightly higher in early action Monday as stocks and investor risk appetite take a break from recent upside. As of this post, the gold market is up about $.80 per ounce at $1460.50 per ounce. The market had traded over $1464 earlier in the session but has come off its recent highs.

 

There are several factors this week that could influence the gold and stock markets. Two of the biggest potential issues could be the proposed tariffs going into effect against China on the 15th, as well as the UK election being held on the 12th. Of course, investors will also be paying close attention to any key pieces of economic data as well as the ongoing trade negotiations between the U.S. and China.

 

The continuing Brexit saga has put markets back on edge in recent weeks as the deadline again approaches. Although Boris Johnson and the Conservatives have a double-digit poll lead heading into Thursday’s vote, the gap has been tightening in recent weeks and anything could happen. Even with a victory, Johnson and the political party may not be able to pull off a Brexit deal as suggested. Lack of a deal, or a no-deal Brexit, could potentially lead to heightened market volatility and uncertainty in the weeks and months ahead.

 

Although recent discussions appear to be productive, the U.S./China trade war continues, with further tariffs set to go into effect on December 15th. If these duties are implemented, it could potentially undo much, if not all, of the progress that has been made in recent talks. On Friday, China waived tariffs on U.S. soybeans and pork as a show of good faith in recent discussions. China may be hoping that the U.S. will follow suit, yet President Trump appears to have no plans of letting China off the hook. China has asked the U.S. to roll back tariffs as part of a “phase 1” agreement, but the U.S., thus far, appears unwilling to do so.

 

If further progress between the globe’s largest economies is not seen in the weeks ahead, investors could become uneasy and selling in risk assets could intensify. Such a scenario could produce a lose-lose situation for the Trump administration, which needs to make a solid, pro-U.S. deal with China on trade but may also need stronger stock markets as the 2020 reelection campaign gets into full swing.

 

The gold market has thus far held above the $1450 level and may continue to do so. Although a more serious dip cannot be ruled out, the market may simply be waiting for a fresh, bullish catalyst to take prices back towards the $1500 region or beyond.

 

It may be unlikely that the yellow metal falls much further than recent lows, however, as numerous long-term issues may remain supportive in the years and even decades ahead. These issues include rising sovereign debt levels, central bank monetary easing, weaker fiat currencies and an aging equity bull market that is likely to run out of gas at some point.

Crisis Era Jobs Data

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According to Statistic Canada’s monthly job report, Canada saw the biggest monthly drop in employment in November since the financial crisis. This staggering headline should have been somewhat anticipated given the recent disparity between employment growth tracked by StatsCan’s two different surveys; albeit, the shortened timespan over which this moderation occurred creates a shock. Job growth in Canada over the past year is now averaging approximately 26 thousand positions and growing at 1.6%, which is more in line with the broader performance of the Canadian economy.

Beyond the sticker shock, the most noticeable afterthought of today’s job numbers is that the Bank of Canada didn’t have this data when they chose to keep interest rates on hold this past Wednesday. As expected, going into the announcement, the Canadian central bank left rates unchanged for the ninth consecutive meeting.

Today’s data is further indication that the economy is softening into next year. And another headline Friday competing with the disastrous job numbers was that Stephen Poloz will not stand for reappointment as the Bank of Canada Governor. His term is up June 2, 2020. This too, although not a surprise, as no governor since Gerald Bouey in the 1970’s and 1980’s stood for two consecutive terms leaves further uncertainty around policy direction in the new year.

Forecasts have been consistent that the Bank of Canada would eventually need to keep pace with the rest of the Western World central bankers and follow their leads into cutting interest rates. For several reasons, Canada was able to hold off (for the time being), as the Canadian economy saw what may be viewed as anomalous strength through the third quarter. Business investment picking up was a positive indicator, but ultimately other macro indicators, and particularly ones linked to trade are seeing past strengths viewed as one-offs.

All bets are (or perhaps were) on for the Bank adjusting course in the beginning of next year, but what has been overlooked is whether Governor Poloz will position himself as a lame-duck. This would be in lieu of actively adjusting policy rates. This does not render him impractical in a scenario where he may need to be reactive, but in a ‘status quo’ economy and given his track record over the past near 7 years, the most probable outcome is a central bank shifting to the sidelines.

What we have witnessed with Stephen Poloz is a Governor that may often over-speak but has exercised more caution and restraint when it came to adjusting policy and rates.  Absent from economic conditions seriously deteriorating into 2020, it would seem more likely in the conservative realm of the central bankers that they hold the course. For this, there are examples in modern history where the incumbent does not look to prescribe the policy of their successor.

This does not necessarily alter our views for the direction of the Canadian dollar, which we still see trending lower into the new year. That said, it is also unlikely the economy falls out of bed, which for this reason enforces the status quo scenario. Canada’s job numbers were disastrous, but given the overshoot of the prior months, it’s more likely that we are witnessing a return to mediocrity.

The Week Ahead in Gold

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As investors return from last week’s Thanksgiving Day Holiday, markets may see an increase in volatility and movement. Stocks are declining in early action on Monday, as some key pieces of economic data point to a slowdown. The gold market is thus far not seeing much interest, however, as prices are down nearly $2 per ounce at $1462.30.

The gold market has been stuck in a trading range in recent action, and may require a fresh catalyst, bullish or bearish, to break out of its recent range. Although stocks are moderately lower in early action today, the major stock indexes are not far from recent all-time highs. Investor appetite for risk also remains mostly upbeat and hopes for an initial U.S./Chinese deal on trade may also lend markets a large degree of support. Some positive economic data coming out of China over the weekend may also fuel some risk appetite and equity buying. Factory activity in China reportedly came in at 50.2 for November, a rise from October’s reading of 49.3. A reading above 50 indicates expansion, while readings below that level could signal contraction. The 50.2 reading is the first time in seven months that the nation’s PMI has shown growth and could potentially point to other gains ahead.

Although hopes are higher today for progress between the U.S. and China, President Trump has also commented today on metals tariffs from Brazil and Argentina. Trump said (via Tweet) that he will reinstate steel and aluminum tariffs on metals from these countries. The concern now may be what kind of retaliatory response to expect. The reinstatement of tariffs also comes at a time of rising hope for U.S./Chinese progress and could act as a major barrier to further upside in equity markets. President Trump is currently expected by some analysts to hold off on raising tariffs, a move set to take place on December 15th, in order to keep U.S./Chinese negotiations going strong. A lack of an increase could potentially weigh on gold while giving stocks and risk assets a boost. An increase as planned, however, could potentially fuel risk aversion, sending equity markets lower while providing a potential boost to gold and other hard assets.

In other news, police activity picked up in Hong Kong over the weekend. Police reportedly fired tear gas into a crowd of protestors in Tsim Sha Tsui on December 1st. Although no major injuries have been reported, the move could signal a rise in tensions between protectors and lawmakers. After nearly six months of unrest, the Hong Kong economy is set to show some lesions. The city could post its first budgetary deficit since the early 2000s. In addition, retail sales and other key economic indicators could potentially show significant weakness due to the unrest. Economic growth could be lower by two percent, or even more, this year due to ongoing unrest. Companies, both large and small, will soon be faced with major decisions. As rental agreements and employee bonuses become due, many businesses could be forced to close shop. Others could look to stay open, however, and may try to negotiate heavily on rental space and other costs of doing business. Visitors to Hong Kong have also declined sharply, reportedly by some 44 percent in October, to make matters even more challenging. The months ahead could pose a large degree of risk not only for Hong Kong but for China and the global economy.

The widespread assortment of economic and geopolitical risks may keep a floor under gold prices. The bulls have, thus far, been able to maintain trade above support at the $1450 level but need to see more upside in order to attract more fresh buying interest. The $1500 level may act as resistance on any significant rallies. A breakout above this region, on a closing basis, could lead to sharply higher prices in a short period of time.

Short Canada

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Post-election, the bears are coming out of hibernation. It’s in stark contrast from the story being told during the third quarter. As the rest of the world cut interest rates to adapt to a slowing global economy, the Bank of Canada was able to stand pat. In the discussion, points were raised about their ability to do so as interest rates were at an already accommodative level. Moreover, as the Canadian central bank’s policy rate has typically closely followed the US Federal Reserve, the resounding question was if they won’t cut rates now, then when? To some, it seemed clear they were just buying time.

Consensus forecasts are for the Bank of Canada to lower interest rates in the beginning of next year. In terms of a softening Canadian economy, recent data could certainly support this action, but also to the contrary, third quarter GDP data from Statistics Canada justifies this Goldilocks’s economy (not too hot, not too cold).

There were two standout areas of concern as Canadian exports have edged lower over the past year, apart from the anomalous double-digit print in the second quarter. Household consumption growth is minimal and business investment had been lackluster, but it too saw a revival in the most recent three-month thanks to a revitalized residential housing market. What we’re witnessing is mixed economic data with a downward bias.

Canadian employment data is also flashing signs of caution. Into the election, the strong results of Statistics Canada’s Labour Force Survey were refuted by notable Bay Street economists. The issues raised were over both job quality and concentration in the public sector. The time-lagging Survey of Employment, Payroll, and Hours highlights a diverging trend in the oft volatile Labour Force Survey, which tends to steal headlines. In the latter survey, job losses were reported in retail and construction in September. It takes us full circle to what was the standout areas in the Canadian economy that now may be nearing an inflection point.

It raises the question to whether the burst of hiring and spending from Canadian businesses is sustainable in a lackluster economy. As we suggested in past newsletters, Canadian businesses will be hard pressed to escape the global headwinds of deglobalization from trade tensions and geopolitical unrest.

This was reinforced by notable comments this week from the CEO of Quebec’s Pension fund, Michael Sabia. Sabia, who will be stepping down in February following a decade of near double digit returns under his leadership, suggests a fragmented global economy with different regions of influence. Also notable from Sabia’s tenure was increasing the funds allocation to international markets, which is another key takeaway.

To what extent the prognostications of a fragmented global economy come true, the notion of a slowdown in Canada is coming to fruition. Since the inversion of Canadian and US government bond yields mid-Summer, investors have been on recession watch. Absent of a market shock, highly levered Canadian households will see continued moderation of consumer led growth. Calling or predicting the next downturn is its own challenge, but momentum is clearly slowing.

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The Week Ahead in Gold

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The gold market is off to a slow start this week as stocks and risk assets see a heavier bid as the new trading week gets going. Although the news and headlines may sound a bit rosier today, for the most part the news simply appears to be more of the same that has driven equity markets for several months now.

 

Over the weekend, China released a document that in part discussed the importance of intellectual property rights. The report also noted that those rights must be protected. Intellectual property rights have been a major sticking point in the ongoing U.S./Chinese trade negotiations for some time now, and an agreement could help pave the way for a phase 1 agreement being reached, possibly before the end of the year.

 

In addition to the Chinese document, Robert O’Brien, a U.S. national security advisor, said over the weekend that a phase 1 deal could potentially be reached before 2020. O’Brien did, however, also reiterate the notion that the U.S. would not be willing to turn a blind eye to other Chinese activities, including Hong Kong unrest and the South China Sea. His comments, combined with the Chinese paper, appear to be fueling appetite for risk as the new trading week gets under way. It is important to keep in mind, however, the fact that this is not the first, nor likely the last, time that positive commentary has driven market action. This has happened several times over the previous months, and each time the trade war has again weighed on stocks and overall investor sentiment. This time may prove to be no different.

 

As stocks rise today, the gold market is under moderate pressure. Spot prices are slightly lower in mid-morning trade, falling by some $2.30 per ounce to $1458.80. Price action is fairly slow thus far today, however, and the market may trade sideways the rest of the session barring any other new developments on trade. The bulls have thus far been able to hold the $1450 region, but another test of that area could be seen this week. A breakdown below $1450, on a closing basis, could spell trouble ahead for the yellow metal as more bears could look to get into the market on further weakness. Another successful defense of that area, on the other hand, could potentially assist the bulls in taking prices back towards the $1500 area.

 

The gold market has been in a downtrend on the daily chart for several weeks now, and any significant rallies could be sold into. The bulls need to take prices back above the psychologically key $1500 level in order to attract further buying interest. The bears will look for a close below $1450 and then the $1400 area to confirm further downside.

The current state of range bound price action in gold could take some time to work itself out. Although stocks have been moving further into fresh all-time high territory as appetite for risk has increased, there are still several, major issues that could keep gold on the offensive in the months and years ahead.

Least Dirty Shirt

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As we make our way into the end of the year, I’m always very intrigued to read the market outlooks for the year ahead. It seems to be a time when economists and analysts make grandiose predictions for the twelve-month period yet are challenged with only having the ability to look through a myopic lens. The humour in it is, that it has some extra special significance other than creating a yardstick to compare previous periods’ gains or loses.

In addition to this though, the forecasts and predictions seem quickly forgotten. That said, one area of interest is away from the numbers and instead on the investment themes or undertones to the markets that some of these forecasts elaborate. As an active investor, this is where I often find some value. It can also suggest where the ‘herd mentality’ or most mainstream opinions in the markets are, for what they’re worth.

I was struck by a more prolific perspective though over the past couple weeks from Bridgewater Associates, Ray Dalio. From someone that co-founded the biggest hedge fund in the world, his views on the economy have been rather prescient as he has found an ability to succinctly and logically explain, in his perspective, these uncertain economic times.

Dalio suggests that the economic malaise and slowdown is of greater significance than what happens during a boom and bust cycle, and that is a bigger picture debt crisis. He refers to Monetary Policy 1 through 3 which involves lowering interest rates, to quantitative easing and expanding the central banks’ balance sheets to purchase longer dated debt and securities, and there by eventually monetizing federal deficits by printing money. None of the mentioned ‘solutions’ will actually reverse a slowing economy challenged by debt and underfunded liabilities from healthcare to pensions.

This has also been an angle of skepticism of the economic cycle that saw us escape from the Great Recession. The factors that led to the financial panic such as overextended households and governments carrying too much debt hasn’t seen much if any improvement. For those that continued to warn or speak to this issue, a kicking the can down the road approach from policy makers bought time. None the less, this year has seen reports from financial bodies including the IMF and World Bank that the composition of corporate debt has worsened. Further, the global economy now carries more debt than any point in history, and total debt is growing faster than output. Beyond the question of whether a trend like this is even sustainable is one conclusion from Dalio that it will not ever be paid back.

During the financial crisis, conventional wisdom made it hard to explain why some asset prices went higher in a period of dire outlooks and elevated uncertainty. Investors looked for safety in commodity currencies or US treasuries, despite what many perceived as inflation risk created by quantitative easing (or Dalio’s Monetary Policy 2). My favourite analogy though likened the havens of capital to the least dirty shirt. It wasn’t that the Canadian economy was scot free per se, but what mattered was how it was measured. Coming full circle on Dalio’s view and as he suggests a ‘paradigm shift,’ begs the question, which asset or asset class may be the least dirty?

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The Week Ahead in Gold

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The gold market saw some further selling on Monday as chart-based sellers appear to be increasingly emboldened. Although the U.S. Government was closed on Monday in observance of the Veteran’s Day Holiday, stock markets were open. Action was not predetermined in either direction, however, as the benchmark S&P 500 finished the day slightly higher while the Dow Jones Industrial Average and Nasdaq lost ground on the session.

 

U.S. stocks are not far from recent and fresh all-time highs, and the likelihood of another test higher could potentially be keeping a lid on inflows into gold and other hard asset classes. This could remain the case until stocks, or gold, show a significant breakdown in price.

 

There was no fresh news on the ongoing U.S./China trade war over the long weekend. President Trump suggested on Friday that he was not willing to roll back tariffs on Chinese goods in good faith, and that sentiment still seemed to be present on Monday. Although Trump further suggested that talks were going very well, it could still be some time before any long-term agreement is reached between the globe’s first and second-largest economies. Various delays could keep market volatility on the rise, and the potential for a significant sell-off still exists. This could, in turn, keep gold and other alternative asset classes from declining too far too fast.

 

The gold market needs to take out the psychologically key $1500 level again, and soon, in order to inspire more confidence. For the time being, however, the market may be content with simply holding ground and not seeing additional declines. The gold market has a lot to potentially look forward to and 2020 could see heightened stock market volatility alongside rising gold prices. Given the current economic and geopolitical backdrop, the powers that be may simply look to stay long the yellow metal until the next major, bearish issue for stocks unfolds, or until the gold market starts moving higher again.

 

Either way, the market appears to be in the process of building higher lows, and that is a process that can take some time to develop. The long-term path for gold could be sharply higher from recent levels. Stay focused on the long-term and forget the short-term. Who cares? Just as it makes no difference to your long-term portfolio success if one of your stocks goes sharply higher tomorrow, it also makes no significant difference if the price of gold rises by $10, $20, or even $50 per-ounce. In fact, a gain of $50 per-ounce, while respectable, would still be very small potatoes compared to what the market could potentially add on in the years ahead (hundreds or even thousands more per-ounce).

The time to be buying, and to keep buying, is now. Right now. Doing so has never, ever been easier and arguably never more important. All you have to do is pick up the phone. You will likely be quite glad that you did in the years ahead.

Cautious Optimism

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Last Friday, Bank of Montreal likened the events to take place on the economic calendar this week to essentially every major world sports event taking place within a 24-hour time period. From GDP prints in the United States and Canada to Brexit deadlines to central bank meetings, there was the potential for some market moving events. However, as expectations seemed to be fairly matched to prior telegraphed policy guidance, there were no major market gyrations.

The US Fed, as per usual, took center stage this week as they culminated what is expected to be their third and final interest rate cut in their ‘mid cycle policy adjustment’. As Fed Chair Jerome Powell made clear, it will be international disturbances that could prompt them to act again. But their return to neutrality was certainly reinforced by the economic data out this week. US GDP prints for the third quarter were stable and slightly above expectations. Job market growth reported Friday was again better than expected with revisions to the upside for the prior two months. It remains that the US economy is benefiting from the unfaltering of the American consumer.

In Canada, in aggregate it wasn’t that different a story. The Bank of Canada has held pat as the Western World’s central banks have shifted policy rates to a more accommodative level. The minor move lower in the Canadian dollar was in reaction to perhaps a dovish undertone that eventually the Canadian central bank will have to act, but likely not until the new year. Noticeably, in the last quarter has been the strength in the Canadian dollar as the strongest performing currency in the G10. The major factor had been interest rate differentials between the US and Canada, but as we’ve seen in the past, this can only go so far until strength in the loonie comes at the cost of Canadian exports and productivity weighing on growth.

Perhaps the missed headline in the past week has been the strength of the US equity markets as Brexit uncertainty and trade tensions have subdued. The story, however, goes a little deeper. As investor focus has been squared on when the next recession may occur, the US corporate sector reinforced the notion of some underlying strength in the US economy.

Data from Factset showed that of 342 companies in the S&P500 companies to report earnings thus far, about three quarters have beaten their estimates for earnings growth, reinforcing the idea that the market consensus may have gotten a little too bearish. In addition, big names like Johnson and Johnson and Intel have all raised their outlooks for the year ahead. As Apple in the past had been a general bellwether for equity markets, they too had strong earnings carrying their stock to new record highs.

The message seems very clear. Over the past couple of months there have been warnings from the IMF and World Bank and caution exhibited by policy makers and central bankers over the vulnerability to economic growth and financial markets. Former Bank of England Governor Mervyn King proclaimed, “economists and policymakers are sleepwalking towards the next crisis.” Still as the markets trade on record highs, we can think back as recently as the beginning of August when the S&P declined 6% in as many days.  For now, protection is imperative, especially as the trend for US stocks is higher.

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