The Weak Ahead in Gold

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The gold market is moderately lower in early action Monday as stocks remain not far from record highs. Although a bullish outlook for stocks may keep any gains in metals limited, gold and silver are not likely to fall too far. Numerous issues could potentially keep the metals on the offensive, including ongoing U.S./China trade talks, the Trump Impeachment Inquiry and more.

 

Despite some additional downbeat data out of China over the weekend, stock investors appear optimistic in early trade today. Reports over the weekend have suggested that the U.S./China Phase 1 deal is nearly ready for signatures in what could be the biggest sign yet of a deal getting closer. Although a long-term agreement could take a few-if not several-more months to finalize, the Phase 1 portion would certainly be a step in the right direction. Any type of agreement made between the U.S. and China at this point could score some significant points, and stock markets could even embark on a fresh leg higher. President Trump on Monday has suggested that the ongoing trade talks are ahead of schedule and that part of the deal will be signed ahead of schedule. He did not, however, elaborate further on the potential timing of a deal. Trump has also suggested that he hopes to sign a deal with Chinese Leader Xi Jinping at a summit next month in Chile.

 

Although the ongoing trade talks remain an important focal point for investors, they are not the only one. Despite a deal being reached, or even the outline of a deal, stocks could potentially have a tough time moving higher following recent strength. Some markets have been moving up on the notion of easier monetary policies, and any letdowns in that arena could set the stage for a significant pullback in equity markets.

 

The U.S. Fed is set to meet again this week. It is widely expected that the central bank will cut rates again by another 25-basis points at the conclusion of its meeting on Wednesday.  Beyond that, however, is a far-more dangerous game and the Fed could even look to stay somewhat hawkish as other global central banks turn increasingly dovish. A hawkish Fed could set up a nice sell-off in stocks and risk assets while providing plenty of ammunition for higher alternative asset prices. Even if the central bank were to signal an end to its current easing this week, rates are still not likely to be going anywhere anytime soon. An extended period of ultra-low rates may keep stocks afloat for longer, but at the same time could also enrich gold and alternative asset classes. A rate cut this week has already been baked into the cake, but markets will likely be far-more concerned with the Fed’s commentary and any plans it may divulge going forward. Of course, the Fed and other central bank plans could also change rapidly as any new developments in the trade war are aired.

 

For the time being, gold looks to set to continue its sideways price action. Any significant dips in the market are likely to be bought aggressively as markets await further news on the trade war. Despite whatever the Fed does or does not do or even say this week, the outlook for easier monetary policies all over the globe is on the rise and could keep any dollar upside limited. This could, in turn, keep stocks on the offensive while also giving gold and other hard assets a boost. Such movements would not likely turn into a trend, however, as eventually stock investors will want more easing to keep equity markets moving higher. If, or perhaps better, when, the Fed has decided that enough is enough, stocks could potentially start to see increasingly bearish activity as the decade-long uptrend may have finally run its course.

The Week Ahead in Gold

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Although markets are open on Monday, U.S. banks are closed.  The day has been quiet as many celebrate the Columbus Day Holiday. Stocks were mostly mixed while gold saw some slight gains on the session.

 

A degree of risk aversion appears be creeping back into the marketplace to start the new trading week. The ongoing U.S./China trade negotiations continue to be a source of worry for investors. The optimism that was seen late last week on the notion of a “Phase 1” agreement with China has quickly faded. There could be a variety of details that still need to be worked out, and China has already suggested that it may want to go overt the details further before coming to an agreement. Hanging in the balance are additional tariffs on Chinese goods that could still go into effect if an agreement is not made. Any further escalation in the trade war could be a source of market volatility and selling in stocks.

 

The Brexit saga also continues to draw attention as more concessions are desired from British Prime Minister Boris Johnson, making an agreement this week unlikely. Lack of progress could force the Prime Minister to write a letter requesting an extension for Brexit until January 31st.

 

Numerous issues including the trade war, Brexit, Trump impeachment inquiry and Middle East tensions all have the potential to fuel volatility this week. The dollar saw a slight bump on Monday from a three-week low reached late last week. As economic and geopolitical tensions mount, the dollar could potentially catch a larger bid and compete with gold for safe haven inflows.

 

U.S. politics could play an increasing role in market behavior in the weeks and months ahead. If the Trump impeachment gathers steam, it could send investors running for the exits. As the 2020 election approaches, a legitimate democratic challenger to Trump could also shake things up.

 

Another rate cut is expected from the Fed this month. The central bank has thus far avoided taking a more aggressive easing stance and has continued to suggest that any decisions on rates will depend on the data. Any positive data ahead of the next FOMC meeting has the potential to give the Fed reason for pause. Although the central bank will likely still cut rates by another 25-basis points, a lack of dovish commentary could leave markets with the impression that the Fed could be done. If the Fed signals it is on hold, the gold market could see more selling pressure without any fresh bullish catalyst.

 

The gold market continues to try to hold onto the $1500 level. Thus far, the market has not been able to mount a significant challenge of recent highs, and it could become increasingly vulnerable to a larger sell-off in the absence of a rally. A downtrend has been in place for several weeks now on the daily chart, and rallies could be sold into until proven otherwise.

The Week Ahead in Gold

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There is less risk aversion in the marketplace as the new trading week gets started, and easing fears are weighing heavily on the gold market. In early action, the yellow metal is down at a seven-week low, trading into chart support around $1480 per-ounce.

 

The market is reacting to news that the Trump administration is not considering limiting U.S. investors’ activity in China or the de-listing of Chinese companies by U.S. stock exchanges. The initial reports of such possible actions late last week threw markets a curveball, but thus far there does not appear to be any substance behind the reports. Such a move would represent a significant escalation in the ongoing trade war and could potentially fuel a large degree of risk aversion and even panic.

 

The trade war remains a major focal point for investors, and there is some optimism as the next round of talks approaches. A Chinese delegation will be coming to the U.S. for high-level talks on October 10th and 11th, and at the very least markets are hoping for the initial groundwork for an agreement.

 

The Trump impeachment drama is also likely to garner attention. Although stocks initially sold off on the news and gold got a boost, equities have since bounced back. Thus far, it seems that the impeachment inquiry has been largely swept under the rug and it’s business as usual. That could potentially change, however, if the recent whistleblower complaint gains more traction.

 

Of note is recent dollar strength. Since the impeachment proceedings were announced, the dollar has been on the rise and is now sitting around a fresh 12-month high. Investors appear to have a preference for the greenback over gold at this point and should that trend continue it could potentially keep pressure on the metal.

 

A key line in the sand for gold may be the $1480-$1490 area. A solid close below this region could signal further downside and could cause more bulls to throw in the towel. Although such a move could send the market lower and negate the recent uptrend, a significant leg lower or bear market seems highly unlikely.

 

Against the current economic and geopolitical backdrop, the market may not fall too far. Numerous issues, including a failure of trade talks, a no-deal Brexit, an escalation of Iranian tensions and the Trump impeachment proceedings could all move markets quickly. Given the Fed’s data-dependent stance as well, key economic reports may also move markets as rate expectations change. This week, the latest ISM Manufacturing data as well as the September non-farm payrolls report could point to further economic weakness or a rebound. Any significant misses in the data could send gold back to $1500 in a hurry as markets become increasingly dovish. Significant strength in the data, however, could be a major negative for gold as it could keep the Fed from taking a more aggressive approach to further easing.

 

Ongoing weakness in China, the EU and elsewhere is likely to keep the central bank easing trend intact, and the ongoing era of cheap money should continue to be supportive for gold.

The Week Ahead in Gold

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The gold market is off to a good start to kick off the new trading week as prices are up over $8 per-ounce in early action. Strong safe haven demand and technical buying are featured and could potentially lead to further gains in price in the coming sessions.

 

Last week, the U.S. Federal Reserve cut the Fed Funds rate by 25-basis points in a move that was widely expected. The central bank did not, however, paint a very clear picture of further easing. The reaction to the cut was muted, and the Fed may have to take a far-more dovish tone in order to keep stock investors appeased. A lack of progress on trade and other geopolitical risks could potentially force the Fed to become more aggressive in the months ahead.

 

There is mounting evidence that the global slowdown could be accelerating. Recent eurozone manufacturing data was downbeat to say the least and has fueled an increase in risk aversion. Activity in Germany’s key manufacturing sector sank in September to the lowest level in more than a decade. The nation’s manufacturing purchasing managers’ index declined to a reading of 41.4, well into contraction territory and far below analyst estimates of 44. The country’s composite PMI, which includes both the manufacturing and services sectors, declined to a seven-year low.

 

As the economic engine of the eurozone, such weakness coming out of Germany is a major cause for concern. Ongoing anxiety over trade, Brexit and other economic and geopolitical issues are all taking a toll, and the ECB will likely be forced to implement further measures in order to prevent the region’s economy from slowing further.

 

The U.S./China trade war also continues to fuel safe haven buying. Stocks saw early gains slip away to end the trading week as news spread that Chinese negotiators would not be meeting with farms in Montana and Nebraska as planned. High-level meetings are still set to take place early next month in Washington, however. A lack of progress at those meetings could fuel heightened volatility and a more significant downturn in stocks.

 

Tensions in the Middle East also remain elevated following the recent attack on Saudi oil facilities. The U.S. has ordered further sanctions against the central bank of Iran and has also ordered more troops to the region to strengthen Saudi Arabia’s air and missile defenses.

 

The fundamental and technical landscape for gold looks very positive. The ongoing trade war, Brexit, Middle East tensions, unrest in Hong Kong and the accelerating global economic slowdown may all keep the metal well-supported. From a technical perspective, the uptrend is intact, and prices could be gearing up for a challenge of recent highs. Thus far, willing buyers have stepped in to buy the dip to $1500 or less, and that trend may continue until proven otherwise. With so many major issues at stake, it is difficult to see a scenario in which the yellow metal sees a more significant decline.

The Week Ahead in Gold

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Another major geopolitical issue can now be added to the list of bullish catalysts that could potentially send gold sharply higher. Over the weekend, the largest Saudi production facility was attacked, igniting fears of a major conflict in the Middle East. The attack reportedly removed 5 million barrels per day from the market which is over half of total Saudi production. The cut in production is the largest ever and sent oil prices soaring. Brent crude leapt by 20 percent on the news while WTI crude also saw a significant double-digit jump.

 

The U.S. believes that Iran was behind the attack, although the country has denied any involvement. President Trump was quick to respond, suggesting that the U.S. could potentially take military action once the perpetrator was known. He also said that he would authorize the release of oil from the Strategic Petroleum Reserve if necessary to keep the market well-supplied.

 

No official timeline has been given yet for restoration of production to previous levels. Some reports have suggested that about one-third of production could be restored as early as Monday.

 

The attack on Saudi oil facilities represents an attack on the global economy. If the damage cannot be repaired quickly, there are concerns that oil prices could spike to $75 or even $100 per barrel. A sharply higher oil price could potentially be the straw that broke the camel’s back as the global economy is already fighting a significant slowdown. Not only could higher oil prices put the economy into recession, but they could also cause central banks to rethink their currency policy stances if higher costs are paid by the public as inflation accelerates.

 

As markets continue to monitor the situation in Saudi Arabia, any further attacks or military action taken by the U.S. or its allies could stoke significant risk aversion. If crude prices continue to rise, that too may cause market unrest and increasing volatility.

 

The major economic news of the week will be the FOMC meeting. The Fed is widely expected to cut the Fed Funds rate by another 25-basis points at the conclusion of the meeting. As another rate cut has already been “baked into the cake,” markets will likely focus their attention on the central bank’s commentary, looking for any clues about its plans going forward. The notion of additional cuts has been a major influence on the recent rally in gold, and any hawkish commentary from the Fed has the potential to fuel some profit taking and even a significant pullback.

 

The three-month uptrend on the daily chart is still intact. The bulls are having some trouble defending the $1500 region thus far, however, and a test of technical support around the $1485 level could be seen soon if the market fails to put together a sustainable rally.

 

Given the current economic and geopolitical backdrop, prices may not have to fall far before finding more willing buyers. The combination of a slowing global economy, central bank easing and numerous geopolitical risks may keep any dips in the market shallow and viewed as an opportunity to buy on sale.

The Week Ahead in Gold

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The markets will kick off the shortened trading week following the Labor Day Holiday with all eyes again turned to the ongoing U.S./China trade war and the latest developments in the Brexit saga.

 

Over the weekend, 15 percent tariffs went into effect on about $110 billion of Chinese goods in the latest escalation in the war on trade. Although China has not implemented further retaliatory tariffs-at least not yet-the move is seen as just the latest step in the feud that could potentially see additional, significant tariffs put into place.

 

The trade war was a very influential theme for markets in August and was the primary catalyst behind rising volatility and some sharp sell-offs. Now that summer is winding down, stocks could have even more problems ahead. Since 1950, September has been the weakest month for stocks, seeing an average decline of about .5 percent. Any further action taken by the U.S. or China is likely to fuel risk aversion and lower equity prices.

 

Some analysts have suggested that thus far the war on trade has not had a significant impact on the economy. The latest round of tariffs may hit consumers directly, however, as rising prices may be unavoidable.

 

Any fresh news on the trade war front has the potential to move markets, but it won’t be the only major area of concern for investors this week. The latest Brexit news could also have significant, global implications and will be closely watched by world markets. As the latest Brexit deadline of October 31st rapidly approaches, lawmakers return from summer recess today and will have the opportunity to prevent a “no-deal” Brexit. Prime Minister Boris Johnson has threatened to call another snap election for October 14th, however, if any efforts are made to block a “no-deal” Brexit. The ongoing uncertainty surrounding the situation has caused the pound to tumble, and the currency recently hit a fresh 34-year low against the dollar.

 

The civil unrest in Hong Kong may also continue to be a source of anxiety for global markets. Protestors recently blocked roads near the airport-one of Asia’s largest-and some flights had to be cancelled. Train and bus service to the airport had to be suspended from the outlying island of Chek Lap Kok and some travelers were forced to walk to the airport. Protestors even attacked a nearby train station. The arrival of busloads of riot police eventually caused the protestors to disperse, but the situation is quickly getting far more serious and dangerous. The question now appears to be whether China will step in to quell the unrest, and if so, how it may plan to do so.

 

The current economic and geopolitical landscape is fraught with danger that may keep a high level of risk aversion in the marketplace. As traders return from summer vacations, markets will likely be driven primarily by headline risk and any further data that points to a significant economic slowdown.

 

Against the current geopolitical backdrop, the gold market will likely stay on the offensive and a challenge of resistance at the $1600 region could be seen in short order. As the market builds a higher base, significant support may be seen at the $1500 level and any dips are likely to be aggressively bought.

Recession Risk

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All the economic and market chatter through the final summer months seemed focused on whether a recession is looming, and whether it will be a result of policy missteps (potentially led there by one global superpower and their bombastic president). It seems somewhat pedantic waiting for a shoe to drop as we’ve seen global economic indicators signal factories and manufacturers output cutting back and other signs that often precede recession. Still, the ace in the hole has been, and (for now) continues to be the strength in the US labour market.

For many, this had been the conundrum over the summer months. In aggregate, the US economy (and here in Canada) continue to look relatively strong. We can also cite indicators that show reason for concern, and those seemed to be concentrated around the business sector and their spending and investment plans, but job market activity has yet to exhibit signs of weakness.

As the discussion continues over what extent US President Donald Trump is successful in jawboning the US Federal Reserve and influencing the direction of their policy, he’s made the epiphany that all he had to do was intensify trade negotiations with Chinese officials. Essentially, the twitter tirades and press conferences criticizing Federal Reserve Chair Jerome Powell made for good headlines, but the ongoing unresolved trade dispute may prove more effective in forcing the Fed to cut interest rates.

Additionally, the escalating back-and-forth tariff announcements through August only further prompted financial market volatility and saw a surge in demand for safe-haven assets. US government debt traded back to record levels and the US yield curve has inverted to the worst level since 2007. Similarly, precious metals proved once again the thought-after asset in volatile markets as gold made multi-year record highs and surpassed all-time highs in Canadian dollars.

The ultimate question is, what’s it to us here in Canada?

One US investment bank suggested that although the Canadian economy looks relatively unscathed to this point, as a commodity exporting nation, we will ultimately be impacted by waning global demand. Furthermore, the Bank of Canada will have no choice but to follow the US Fed and cut interest rates. This will then translate to a weaker Canadian dollar. CIBC economists, however, suggested focus really needs to stay with the United States (and not global events) as we’ve yet to see a recession in Canada without there being one in the US.

Bank of America CEO Brian Moynihan recently said in an interview that he’ is not worried about a slowdown as long as the U.S. consumer remains strong. Of all the indicators, it’ll be the US job market that will paint the picture.

The Week Ahead in Gold

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The gold market ended last week with a bang, finishing higher by nearly two percent on the final trading day of the week. The market currently has upside momentum on its side and could potentially test the $1700 region in short order. The metal has numerous issues that may continue to provide strong tailwinds. The ongoing trade war, Hong Kong unrest and increasingly dovish central bank commentary may all keep the metals markets on the offensive.

 

The ongoing U.S./China trade war remains at the center of attention. Late last week, China announced that it would implement retaliatory tariffs on about $75 billion of U.S. goods. China’s finance ministry announced that it would place an additional tariff of 5 or 10 percent on U.S. imports starting September 1. The ministry also announced plans to resume tariffs on U.S. imports of autos and auto parts starting in mid-December.

 

President Donald Trump was quick to respond via twitter-his seemingly preferred vehicle. He has said the U.S. would respond, and markets will be watching closely this week for any further action taken. The President went on to add by tweet that: “We don’t need China and, frankly, would be far better off without them.”

 

The clear escalation of both action and rhetoric between the two superpowers had an extremely unnerving effect on the markets. The benchmark Dow Jones Industrial Average sank over 600 points while the tech-heavy Nasdaq declined by a solid three percent. It appears that there is not only a lack of progress at this point, but that the gap between the two sides is growing even wider.

 

Commentary from Fed Chairman Jerome Powell at Jackson Hole, Wyoming may also be a source of concern. Powell acknowledged that the economy is in a good place, and that the Fed would act as appropriate. He did, however, also highlight some key risks that could force the Fed’s hand. The Chairman’s speech seemed to back up the notion of another 25-basis point rate cut next month while easing expectations for a larger, 50-basis point reduction.

 

As some members of the Fed have sounded increasingly hawkish in recent weeks, Powell’s comments-which were largely construed to be dovish-may set some minds at ease. Powell seemed to grasp the significance of recent events and key issues such as Brexit, trade, Hong Kong and the global slowdown could force the Fed to have to maintain a large degree of flexibility regarding monetary policy.

 

Although trade may be a primary focus this week, markets will also be getting some key data points that could be significant heading into the next FOMC meeting. The latest figures on Q2 GDP, Durable Goods, Consumer Confidence, Core Inflation, Consumer Spending and more are all set for release.

 

Recent strength could keep the market moving higher in the next week, and any further negative developments surrounding the war on trade may keep buying interest on the rise. With little overhead resistance to speak of, the market could see another rapid and substantial run higher if new tariffs or other action is taken by either side. Any corresponding declines in stocks may also keep the yellow metal on the move.  Although the chart is highly constructive, the market could see a minor pullback in the sessions ahead. The market appears to have set a new, higher bar, however, and any dips may be shallow and aggressively bought.

The Week Ahead in Gold

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The gold market is seeing some mild pressure to kick off the new trading week as investors take profits and as appetite for risk sees a bit of a surge. Over the weekend, The People’s Bank of China took action that could boost its economy. That measure, combined with a renewed optimism over U.S./China trade talks, has stock investors eager to buy at Monday’s open.

 

The People’s Bank of China unveiled a key interest rate reform designed to lower interest rate costs. The PBOC said that it would improve the mechanism used to establish the loan prime rate this month which should lower corporate borrowing costs. The move came following weaker than expected economic data for July that showed the Chinese economy stumbling more than expected. The data clearly demonstrates the negative effects of the ongoing war over trade which drove growth to almost a 30-year low.

 

Talks over trade could potentially be turning a corner. U.S. Economic Advisor Larry Kudlow suggested that recent telephone conversations between U.S. and Chinese negotiators had been positive. Further talks are planned over the next 7 to 10 days and if successful could lead to higher level discussions in short order.

 

In addition to ongoing trade talks, markets will also continue to pay close attention to the yield curve. Inversion of the U.S. curve caused quite a stir in markets last week, and there was no shortage of headlines on the subject as major stock indexes declined by nearly 3 percent in a single day. Some analysts have suggested that risks of a recession are overblown, and that the inversion of the curve is due to alternative factors. Whatever the case may be, the curve could invert again and send markets into a frenzy. If consumers perceive a higher risk of recession, that can lead to a cutback in spending and increase the economy’s vulnerability to a policy mistake and overall global economic weakness.

 

The highly anticipated Fed symposium from Jackson Hole, Wyoming is also taking place this week. Fed Chairman Jerome Powell will have no shortage of issues worth discussing including effects of the ongoing trade war, negative yields and the rising risks of a U.S. and global recession. It is expected that Powell will do nothing to suggest that the Fed won’t cut rates again next month by 25-basis points. The bigger question may be if the Fed Chief decides to open the door to a 50-basis point cut or if the central bank signals that recent action is the beginning of a full easing cycle.

 

The numerous key issues including trade, interest rates, the global slowdown, Hong Kong unrest and even Brexit could keep the gold market well-supported in the weeks and months ahead. The yellow metal has been on the defensive in recent action since hitting a high near $1550 last week, although some back-and-fill trade should be considered constructive and is likely nothing more than a healthy pullback. The market remains in a strong uptrend and appears to be building a higher base of support around the $1500 region that could act as a springboard for the next major surge higher.

The Week Ahead in Gold

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The gold market is trading solidly above the key $1500 level as ongoing concerns over global growth and rising geopolitical risks fuel safe haven buying. The ongoing U.S./China trade war and increasing unrest in Hong Kong are at the center of attention as the new week kicks off.

 

Over the weekend, protests again took place in Hong Kong and concerns have been mounting about police handling of those protests. The weekend reportedly saw some of the worst unrest yet in the more than two months of demonstrations thus far, and allegations of police brutality are only aggravating the situation further. The Hong Kong airport authority was forced to cancel more than 120 flights on Monday as thousands of demonstrators filled the arrival and departure halls, joining a sit-in at the terminal that began late last week.

 

The Hong Kong airport is one of the globe’s busiest, and the shutdown shows just how much of an impact the protestors can have on the nation’s ability to function. The ongoing conflict is ratcheting up the pressure on authorities, who are growing increasingly concerned that the unrest could tip the local economy into recession. Hong Kong is already dealing with the effects of the U.S./China trade war, and analysts now wonder how much longer mainland China will allow the unrest to continue before a major crackdown is seen.

 

The trade war also continues to be a major influence on global financial markets and is the main culprit behind the recent volatility expansion. The most recent escalation saw China allow the value of the yuan to trade at the lowest level in more than a decade. The trade war could quickly become a currency war, and it has now been suggested that trade talks planned for next month may not take place at all. This has investors wondering not so much about when a deal may be reached, but rather what may happen if talks collapse completely.

 

If no progress towards an agreement is made, further tariffs and possibly even currency interventions could be seen. The global economy will almost certainly fall into a significant recession. The Federal Reserve will do what it can to combat the slowdown but may find its efforts largely ineffective as it can only cut rates so much. The central bank could then be forced to implement fresh QE or other measures to stimulate the economy, and it could potentially take years for activity to return to pre-crisis levels.

 

The current environment of economic and geopolitical risks, negative yields, central bank easing, and rising market volatility could continue to be very supportive of higher gold prices. The market has quickly and decisively distanced itself from the $1450 breakout region and could potentially see another rapid run higher if tensions escalate further. Against the current economic and geopolitical backdrop, a run towards previous all-time highs near $2000 per-ounce is not only plausible but increasingly likely. In the meantime, the market may need to spend some time digesting recent gains before forging ahead. Any dips in price are likely to be shallow and may be aggressively bought.