The Week Ahead in Gold

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Stock markets have taken an ugly turn for the worse on Monday as risk aversion takes hold. Increasing worries over the U.S./China trade war, unrest in Hong Kong and concerns over Brexit are all playing a role in a major sell-off that has seen stocks trade lower by over 2 percent in early action.

 

Last week’s announcement by President Trump that he would add another 10 percent tariff on an additional $300 billion of Chinese goods is the latest action taken by the administration as ongoing trade talks appear to be largely fruitless. That decision has now been met with further action from China, however, as the nation has allowed its currency to take a drastic slide. The yuan recently traded at just over 7.08 against the dollar in offshore markets, and Monday marked the first time the yuan traded over the 7 per-dollar rate in over a decade. In addition to allowing its currency to fall, China has also reportedly directed state-owned companies not to purchase U.S. agricultural products.

 

President Trump accused China of currency manipulation, and the ongoing trade war could turn into a full-blown currency war. China’s recent actions suggest that they are comfortable allowing the yuan to slide even further, and both nations appear ready and willing to take increasingly drastic measures. With little progress being made in ongoing trade negotiations, the situation may get a lot worse before it gets better.

 

The heightened trade tensions come as markets are already battling several key issues. Last week’s interest rate cut from the Federal Reserve did little to appease stock market bulls. Although expectations for a 50-basis point cut had dwindled to almost zero, markets were looking for more dovish guidance from Fed Chief Jerome Powell. The Fed did not deliver such guidance, however, and left markets in a state of confusion. Powell’s remarks have led some to conclude that the central bank may not be as aggressive in its easing plans as previously thought, despite ongoing political pressure to lower rates.

 

Recent developments in the war on trade could potentially force the Fed’s hand, however. If China allows its currency to weaken further, the U.S. could be forced to cut rates and weaken the dollar. The greenback is already trading moderately lower today and could come under further pressure if markets begin to price in further easing by the Fed.  A sinking dollar and declining yields could be a major catalyst for sharply higher gold, which could already stand to benefit from falling equities and rising risk aversion.

 

Strong fundamentals and a bullish technical posture have already fueled a significant rise in gold that could see the metal challenge previous all-time highs in the months ahead. The metal has broken above previous resistance to carve out a fresh 6-year high, and with little overhead chart resistance going forward, it could see a swift and significant rise towards $2000 per-ounce or higher. The market is now in a strong uptrend, and any significant dips may be met with aggressive buying.

Confusion, Contradiction, and Chaos

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The financial press was referring to this week as the most important week for investors in all of 2019. At the center of it was the US Federal Reserve. Particularly, the interest rate announcement this past Wednesday where the US central bank opted to cut interest rates for the first time since 2008. It might go down in history as one of the best telegraphed rate decisions from the US fed, juxtaposed by confusion as to why they were shifting policy.

The month leading into the announcement, the debate ranged on one side from why the Fed would be cutting interest rates in the first place given the strength in consumer spending data and US labour market to overly dovish expectations of a new easing cycle beginning with a 50 basis point cut.

Given the market reaction into the end of the week, however, its not only safe to say that investors expectations for a renewed period of fed accommodation were not met, but also heightened confusion around the lack of clarity in the messaging from the US Fed Chair, Jay Powell.

Previous heads of the US Fed have used their opportunities to speak publicly to deliver a clear consistent message as it relates to their current policy approach. Ben Bernanke is associated with the attention he brought to the Jackson Hole Economic Symposium to preview the feds upcoming aggressive monetary policy in the heart of the financial crisis. Janet Yellen always seemed well scripted; albeit, concise and direct in her press conferences discussing normalizing interest rate policy and remaining data dependent. The current chair lacks that same level of clarity and direction in his messaging as his predecessors.

For this reason, focus may shift to what message he plans to deliver at their annual meeting in Jackson Hole at the end of this month. It is an opportunity for him to clarify the Fed’s stance regarding their outlook over the near term. Unfortunately, it seems he doesn’t have the luxury of everyone waiting patiently for his remarks.

It was very evident the US President was one of the people left most disappointed from the Fed announcement Wednesday. So much so, that when Jay Powell hinted that their outlook may improve because tensions between the US and China have eased, it was contradicted the next day with the announcement of new tariffs on Chinese imports for the beginning of September. Given previous interference from President Trump and attempting to influence the US Fed, it seems logical that this tactical announcement Thursday may have simply been attempting to force the Fed’s hand.

In these choppy investment markets, its sometimes easier to think about a thesis or investment approach and then step aside instead of trying to time every directional change. This next month should be no different. As the takeaway from the Fed Announcement was a lack of clarity, it seems they’ll be using their FOMC members to broadcast their policy approach into the latter half of this year. This could be sealed from a scripted speech from Jay Powell at the end of this month in Jackson Hole. The question, given the feds initial shift earlier this year that was questionably influenced by the sitting US president, is what level of interference he may play over the next month.

We’re still expecting a follow up rate cut; the question is how quickly?

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The Week Ahead in Gold

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The gold market appears to be treading water in early action Monday as markets get ready for a variety of key data points and news. At the center of attention will be the FOMC meeting taking place Tuesday and Wednesday as well as the non-farm payrolls report due out Friday. In addition, high level talks will be taking place this week in Shanghai as the U.S./China trade war continues.

 

The Fed is widely expected to cut its key interest rate by 25-basis points at the conclusion of its two-day meeting Wednesday. Although the Fed could potentially take a more significant approach and cut rates by 50-basis points, recent data has suggested such a move may not be warranted at this time. Markets have already priced in a quarter-point cut and will be far more interested in any clues the Fed provides about policy going forward. Some analysts have suggested that a rate cut this week is simply an “insurance” cut and is intended to get ahead of the ongoing global slowdown. Others have suggested that it may be the first in a series of cuts that could potentially see rates back at zero in the quarters ahead.

 

The Fed’s language has the potential to move markets. If the central bank views this as an insurance cut and does not allude to further cuts, it could disappoint stock investors and send equity markets lower. The dollar could potentially get a boost as well, weighing on hard assets. If the Fed’s commentary reflects an increasingly dovish Fed, stocks and gold could rally together while the dollar weakens.

 

The non-farm payrolls data at the end of the week could help temper expectations for further action from the Fed. After a solid addition of 224,000 jobs in June, July estimates put job creation at a respectable 165,000. If the report meets or exceeds expectations, it could potentially give the Fed further reason for pause.

 

In addition to the Fed and economic data, markets will be paying close attention to any progress in trade talks this week. Treasury Secretary Steve Mnuchin and Trade Representative Lighthizer are in Shanghai this week for talks that begin today. Although there has been little progress to report in recent weeks, both sides appear to be increasingly eager to hammer out a deal. A successful meeting this week could lay the groundwork for further dialog between President Trump and Chinese Leader Xi Jinping.

 

The gold market may find itself in a holding pattern until the Fed announcement Wednesday. A quarter-point cut may not have a huge impact on markets but may give the gold bulls the green light to attempt a fresh leg higher. The market may find willing buyers on dips to $1420 and $1400 per-ounce, while recent highs in the $1450 region may act as near-term resistance. An upside breakout of recent highs could potentially set the stage for a sharp and significant rally higher that could see prices hit $1500 in short order. With little upside technical resistance, strong market fundamentals could propel prices to previous all-time highs or beyond in a matter of months.

The Week Ahead in Gold

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The gold market is slightly higher in early trade Monday as investors digest recent geopolitical developments and await policy decisions from the U.S. Fed and the ECB. Following recent strength, the yellow metal may be due for a pullback and a little consolidation before attempting a fresh leg higher.

 

Tensions with Iran have continued to intensify. Late last week, Iran’s military seized a British oil tanker near the Strait of Hormuz. The seizure was reportedly in response to the capture of an Iranian oil vessel by British forces earlier in the month. Oil prices are seeing some additional risk premium coming into the marketplace Monday as prices rose by over 2.25 percent in early trade.

 

As tensions rise between the U.S., Britain and Iran, the possibility of military conflict could increase. A significant U.S. military strike could send Iran a strong message, however, such action could also potentially lead to oil supply disruptions in the region. The Strait of Hormuz is a highly strategic chokepoint, with about 20 percent of the global oil supply traveling through its waters. Any closure or military action in the Strait has the potential to create an oil shock that could have a large impact on the global economy.

 

In addition to the geopolitical landscape, markets will also be paying close attention to central bank activity. The ECB is set to meet this Thursday for its regularly scheduled policy meeting, while the U.S. Fed will be meeting at the end of the month. Both central banks are expected to ease their respective monetary policies, and investors will be looking for clues as to how much more easing could be seen in the months ahead. Some analysts have suggested that the Fed will ease by 100-basis points over the next year, and with little to no inflation in sight there, there is not much standing in the central bank’s way towards lower rates.

 

As ongoing U.S./China trade talks appear to be going nowhere, President Trump could keep political pressure on the Fed to slash rates. Trump may be left with little choice but to raise tariffs on Chinese goods further and look to the Fed to support domestic demand while providing ammunition for exporters.

 

With the 2020 Presidential election quickly approaching, President Trump will remain focused on the economy and asset prices. An increasingly dovish U.S. Fed could pave the way for similar action by China, Japan, Europe and other nations. As the era of easy money continues, currency values are likely to weaken while stocks and risk assets remain artificially elevated.

 

The combination of geopolitical risks, loose money policies and a global slowdown could be the ideal recipe for higher gold prices. The yellow metal remains on the offensive and will likely challenge the $1450 area again in the weeks ahead. Buyers are likely to step and aggressively buy any dips to $1420 and $1400. An upside breakout above $1450 could set the stage for a rapid rally to $1500 and beyond. In fact, there is not much technical resistance to keep prices in check should a breakout occur, and the market could very well set its sights on previous all-time highs in the months ahead.

Doubt

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In a week and a half, the US Federal Reserve is expected to cut interest rates. The question that many (including myself) seem to be hung up on is, why?

Relations between the United States and China have been going back and forth between hot and cold for the past year. The initial shock of a trade war seems to have been absorbed by financial markets and the downside impact to global economic activity and GDP outlooks seems to be realized, for now. Global manufacturing data (a forward-looking indicator for economic growth) for certain Western economies have deteriorated, but other metrics, such as the strong and robust performance of the US labour market seem intact.

Some Bay and Wall Street economists seem to be interpreting and anticipating this move from the Fed as an insurance cut. If this is the case, parallels can be drawn to when the Bank of Canada cut rates in January of 2015 and then again in July of that same year. This was in reaction to the impact of an oil price shock on the Canadian economy and economic devastation in oil producing provinces led by Alberta. Ultimately, they reverted to their path of higher interest rates as what would be deemed a transitory shock worked its way through the economy. Thus, the question whether a US-China trade war may be interpreted in a similar way.

There are certainly examples of pockets of the US economy that are struggling. Economists that align themselves in the bearish camp point to indicators related to trade and manufacturing data, or shipments of semiconductors. The challenge with that is the US Federal Reserve adjusts interest rate policy based on their mandate of price stability and maintaining low unemployment, both measures that seem not to fully prompt any action.

Relating to this, the question may be asked how much further room the labour market has to run and whether the inflation data may be pointing to a disinflationary scenario (when inflation is muted and gravitates towards zero, but not negative or deflation). Longer term, this may be a picture we are looking at, and may be the reason the Fed is no longer talking of raising rates.

It’s hard to take a myopic approach to the markets, and especially gold and precious metals when we participate in a market where the belief in physical gold is in its long-term store of value and its role as a way of adding diversity to one’s financial assets and mitigating exogenous risks. With that said, it seems justifiable that the anticipated action from the US Fed to immediately move to the dovish camp may be hard to justify, and for the financial markets and investors to digest.

For this reason, we see the month end meeting of the Federal Reserve as another possibility for a period of market volatility. Potentially, any interpretation of a ‘hawkish’ rate cut could see gold prices attempt to re-test their breakout of the $1,360 US/oz. Certainly the dovishness of the Fed has been priced in. Anything short of this may provide an entry point for investors that missed this rally.

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The Week Ahead in Gold

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The gold market is slightly lower in early Monday trade; however, the market remains firmly above the psychologically important $1400 level. Global stocks appeared headed for a flat open as investors get ready for the Q2 earnings season and await some key pieces of economic data. Overnight, data from China showed the weakest GDP growth in 27 years. Markets are not showing much reaction, however, as June retail sales, industrial output and fixed asset investment all surprised to the upside.

 

AS the U.S. Fed guides the nation towards easier monetary policy, investors may turn their attention to corporate earnings while also watching for any fresh developments in the U.S./China trade war. Markets may be particularly interested in the corporate outlook for the second half of the year, and companies could provide further clues about the effects of the trade war. The war on trade is likely to remain a key theme in the marketplace as neither side appears willing to budge at this point. Corporations could be forced to lower guidance based on current tariffs and could even alter their plans based on the threat of additional tariffs.

 

The Fed is expected to cut its key interest rate by 25-basis points at the end of this month and could potentially cut it by 50-basis points in order to create more of a shock-and-awe effect. It is clear the central bank will be forced to lower rates, but the bigger question at this point is by how much and how fast. With little to no inflation to speak of, the central bank could become fairly aggressive as it lowers rates again, and some analysts have even suggested the Fed could take rates down to zero.

 

The combination of a global slowdown and trade war will force the Fed’s hands, and in turn should keep gold on the offensive. The dollar index, which has spent much of the last couple years moving higher, appears to have found a top. As the effects of tax cuts and government spending wear off, an increasingly dovish Fed could send the dollar index sharply lower. A breach of the $96 level on the downside could potentially set the stage for a steep decline, and hard assets like gold could stand to benefit.

 

As the dollar tries to avoid a major technical breakdown, gold appears on the verge of a major upside breakthrough. The market has thus far maintained trade above the $1400 level, and recent dips have been bought. With the market trading at multi-year highs, the yellow metal may simply need to take out the highs reached in June in order to really blast off. An upside breakout of this level, which saw spot prices approach $1420 per-ounce, could set the stage for a rapid run to the $1600 area. From there, a retest of previous all-time highs could be seen.

 

The threat of a global recession, numerous geopolitical risks, a dovish Fed and the potential for lower stocks and a lower dollar may all keep the gold market well-supported in the months ahead. In fact, the current economic and geopolitical climate could be the perfect recipe for higher gold prices, and the long-anticipated bull market in gold now appears to be gathering steam.

The Week Ahead In Gold

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The next few trading days are likely to see further adjustments following last week’s U.S. non-farm payrolls data. The jobs report showed the U.S. added a very respectable 224,000 jobs in June while the unemployment rate edged up to 3.7 percent. Wage growth remained at 3.1 percent.

 

The solid jobs report sent market expectations for a 50-basis point rate cut in July sharply lower, and markets are now pricing in less than a five percent chance of a half-point cut later this month. Markets are still pricing in a strong likelihood of a 25-basis point cut, however, and may simply have gotten ahead of themselves.

 

Jobs growth has declined on a three-month rolling basis; however, the amount of jobs being added is significant and could keep the Fed on hold. Despite market expectations for a July cut, the central bank could potentially elect to hold off, possibly until its September meeting.

 

Of course, the Fed has more than just domestic economic data to consider. The ongoing U.S./China trade war is having a significant impact on the economies of both countries, and any further escalation of tensions with Iran also has the potential to affect the oil and financial markets.

 

The question does not seem to be “if” the Fed will cut, but rather “when” and how aggressively. Fed Chief Jerome Powell will be testifying this week before Congress, and the markets will be looking for any potential clues about the central bank’s plans. Given the strong employment data, Powell could potentially surprise markets by suggesting that a July rate cut may be premature.

 

The latest FOMC meeting minutes are also set for release on Wednesday but may be largely considered “old news” before Powell speaks to Congress on Thursday and Friday.

 

The latest reading of the Consumer Price Index will also be released on Thursday. Estimates are currently for no change on the headline figure and a .2 percent rise on the core reading which excludes volatile food and energy prices. Inflation has remained stubbornly below the Fed’s desired 2 percent annual target, and a lower reading may give the Fed continued wiggle room with regards to rates.

 

The dollar saw a bit of upside following the jobs data but has not been able to make any significant upside headway in recent weeks. The currency may start to come under increasing pressure, however, as the effects of tax cuts and government spending fade further and as the Fed gets ready to embark on a series of rate cuts.

 

Despite the recent dip in gold prices, the market appears to be on solid fundamental and technical footing. Some further downside pressure could be seen this week as markets continue to react to the strong jobs data, but the market may begin to firm up again quickly as investors step in to buy the dip. Although Powell’s testimony before Congress later in the week could throw the market a curveball, the central bank may be forced to cut rates aggressively in the months ahead as the global economy slows further. Market expectations for easing and a potential topping process in stocks may keep gold on the offensive in the months ahead.

The Week Ahead in Gold

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The week ahead could potentially see some increasing appetite for risk as President Trump and Chinese Leader Xi Jinping agreed to a truce of sorts on global trade. The news sent stocks sharply higher in early action Monday while gold declined by almost 2 percent.

 

The meetings between the leaders of the globe’s first and second-largest economies were considered productive. The U.S. agreed to back off on some of its threatened sanctions, while China agreed to purchase more U.S. agricultural products. With both sides seemingly willing to hit the reset button on negotiations, optimism is running high and hopes for a deal are on the rise. Despite recent positive developments, however, there is still much work to be done in order for both countries to finalize and agree to a long-term trade pact. The ongoing process of producing such an agreement could take several months or longer, and markets will likely remain quite vulnerable to any negative developments on trade.

 

President Trump also made a surprise visit to North Korea over the weekend and met with leader Kim Jong Un. Trump made history, becoming the first sitting U.S. President to set foot into the country.  Both nations have said they will resume talks over North Korea’s nuclear program. Although the U.S./North Korean conflict has been quiet and on the backburner in recent months, any easing of tensions between the two nations could also fuel buying in stocks and risk assets while weighing on perceived safe havens such as gold.

 

The dollar index was trading at the highest level in over a week on the news and is also likely playing a key role in gold’s declines today.

 

The benchmark S&P 500 is in all-time record high territory, and could potentially see a slew of fresh buyers as FOMO, or the Fear Of Missing Out, sets in. In addition to the trade war truce reached over the weekend, investors are also betting big on a rate cut from the Federal Reserve later this month. The notion of a July rate cut and possibly additional cuts to follow could keep the stock market on the offensive and risk appetite elevated.

 

The gold market has had an impressive run in recent weeks, and today’s declines may represent the first significant test of the recent uptrend. The bulls will need to step up this week to keep the uptrend intact, and prices may need to reclaim the $1400 level in short order to avoid another push lower. The $1450 region remains an area of focus on the upside. An upside breakout of this level on a closing basis could potentially set the stage for a major rally that could see prices retest previous all-time highs over $1900 per-ounce. A failure by the bulls to take this level out could lead to an extended period of sideways price action.

 

Despite recent developments, the gold market still has numerous factors working in its favor. A slowing global economy, the potential for lower interest rates, a weaker dollar and numerous geopolitical risks may all keep a floor under prices.

The Week Ahead in Gold

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The gold market hit a 6-year high in recent trade and appears poised for further upside. The metal may be vulnerable, however, to a corrective pullback before seeing a fresh leg higher in price. The market currently has several tailwinds working in its favor, and the trading week could bring with it fresh news that could propel the market beyond its recent highs.

The ongoing U.S./China trade war is having a measurable effect on the economies of both countries. Since talks broke down several weeks ago, there has been little, if any, dialog between the two nations on trade. U.S. President Trump is set to meet with Chinese Leader Xi Jinping later this week at the G20 meeting in Japan, and markets appear to be pinning their hopes on some productive talks being had. Progress towards a long-term agreement could have far-reaching implications for global markets and could fuel a major shift in investor sentiment. If the two leaders are unable to find any common ground, the ongoing dispute could pressure stocks while keeping gold and other perceived safe haven assets on the offensive.

Current U.S./Iran tensions are also playing a role in recent market action. Over the weekend, the U.S. reportedly announced that it had launched cyber-attacks against Iranian assets tied to the Revolutionary Guard. This action comes on the heels of a reported military strike that was called off at the last minute by President Trump. The U.S. is also set to impose major new sanctions against Iran this week that could potentially stir the pot even further. If Iran is not willing to come to the bargaining table, the potential for military conflict will hang over markets and likely keep a floor under gold prices.

A slumping dollar index may also be an area of focus this week, as the greenback recently traded at a 3-month low. The dollar is likely feeling the effects of an increasingly dovish Fed as markets price in a July rate cut and the strong potential for additional cuts later this year. In addition to the Fed’s about-face, the dollar may also be under pressure as the effects of recent tax cuts and government spending fade.

The gold market currently has a combination of economic and geopolitical factors working for it that could keep the market moving substantially higher. The increasing risk of a global recession, the potential for lower rates, a weakening dollar and numerous geopolitical risks may keep the yellow metal well-bid, and a run higher of another $100 per-ounce or more in the weeks ahead seems to be an increasing possibility.

Current market fundamentals could be considered highly bullish for gold, and the market’s technical posture is now also pointing to further upside. The market is now in an accelerating month-long uptrend on the daily chart, and the bulls may look to test a solid area of resistance around $1450 in short order. A breach above this level on closing basis could set the stage for a push towards previous all-time highs over $1900 per-ounce in the months ahead.

Summer Shift

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Central bank policy decisions and the direction for interest rates have once again captured the focus of economists and financial market analyst’s midway through 2019. The ongoing trade dispute between the United States and China, which has entangled Canada through the extradition hearings of a CFO of a major Chinese technology firm, has continued to increase business uncertainty and has the potential to further weigh on economic growth.

The result has been scaled back GDP forecasts for the Canadian and US economies, and an expectation for a return to accommodative policy from the US Federal Reserve with the Bank of Canada destined to follow their approach. The challenge with the heightened level of anticipation of seeing interest rate cuts from the two central banks is the great level of unpredictability around the destined outcome for US-China trade terms. With that said, the US Fed has softened their stance through 2019.

The question is, why?

US Federal Reserve Chair Jerome Powell may have had one of his career-defining moments in early June when he stated the Fed will act “appropriately to sustain the expansion.” Half a year earlier there was overwhelming evidence of friction between the way this apolitical official conducted his job and the president that appointed him, but the feds stubbornness to a path of steady and higher interest rates seems to be coming to an end. Whether this was a result of political pressures from the oval office or foreseeing lingering economic uncertainty from an unresolved trade dispute is unknown.

What will be difficult to foresee, however, will be whether the Fed is proactive or reactive in its policy approach to a global slowdown or recession that many seem to be predicting. Different US economic indicators in recent months have shown signs of manufacturing slowing, or the labour market stalling in the US (despite being near full employment) but forecasting the duration of this trade war between the worlds top 2 superpowers is a ‘known-unknown.’

Signs of a prolonged dispute have investors fully pricing in odds of the US Fed cutting interest rates in July. Any negative impact felt by the US economy will be reverberated north of the border, and that will especially be the case should tariffs continue to increase and policies become much more punitive and protectionist. The Bank of Canada’s reaction to a rate cut from the Fed may not be immediate, but it will be highly likely for them to follow.  

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