The Week Ahead In Gold

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The last few weeks have seen some of the wildest market action in history, with the Dow Jones recording its largest recorded point decline and the VIX seeing its largest percentage rise. Stocks fought back this week, however, and have regained a large portion of the ground they lost the week before. Whether or not the worst of the spike in volatility is over remains to be seen.

 

One of the primary factors behind the recent selling and surge in volatility is the notion of rising inflation. The last non-farm payrolls report showed rising wages, while inflation data this week in the CPI and PPI reports also pointed to increasing price pressures. As inflation continues to heat up, the Fed could be forced to take action.

 

Although the Fed has penciled in another three hikes for 2018, with the next hike likely coming next month, the central bank could find itself having to hike four times. The Fed could also potentially become more aggressive with its tightening by raising rates 50 basis points rather than 25. Either way, the idea of rising rates has stock investors a bit anxious.

 

Despite the often cited proclamation that higher rates are bearish for gold, the metal has shown it is more than capable of climbing along with interest rates. Although gold does technically come with an “opportunity cost,” as it does not pay a dividend, the metal has the potential to outperform during a tightening cycle.

 

This actually makes perfect sense when one considers the reason for higher interest rates. The job of central banks is to encourage full employment and to maintain price stability. Central banks may be forced to hike rates more aggressively when the economy begins to overheat, causing the price of everyday goods and services to climb as well. While a little inflation is healthy for an economy, inflation that starts to increase beyond desired targets (typically 2% annually) can be quite problematic.

 

As the cost of everyday goods and services increases, there is a corresponding decline in purchasing power. Simply put: Your dollars buy less and less as inflation climbs.

This is especially important given the current context of a weaker dollar and shrinkage of the Fed’s balance sheet.

 

Gold has been-and is widely considered-an asset class that can help preserve wealth and purchasing power. As the value of each dollar declines, hard assets like gold may not only potentially hold their value, but may also increase sharply in value. Although the dollar has shown a bit of a bounce recently, it remains near a ledge that could take prices sharply lower from current levels to multi-year lows.

 

Clearly, some investors see the writing on the wall, as the gold has been on the offensive for several weeks. With the potential for both higher rates of inflation and further volatility in stocks and risk assets, gold could continue its ascent. In fact, an upside breakout from the metal’s recent trading range could attract further buying interest, propelling the metal quickly to $1400 per ounce and beyond.

The Week Ahead In Gold

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The recent carnage gripping global equity markets will likely remain a primary point of focus for investors this week. Last week saw some of the steepest declines in stocks in years, including the largest recorded point drop in the Dow Jones Industrial Average. The mayhem in equities also coincided with the largest-ever daily gain in market volatility as measured by the CBOE’s VIX.

 

Investors will be heading into this week wondering if the worst is over, and a cautious tone is to be expected following recent market activity. Whether the recent sell-off represents a bottom and buying opportunity or a glimmer of more selling to come, one thing seems to be certain: The era of easy gains and non-existent volatility is over.

 

Rising bond yields have been a major story for Wall Street in recent weeks, with the benchmark ten year note yield approaching 3%. The bigger picture, however, is more alarming. Bond yields are rising, and rising rapidly, due to increasing inflation expectations. Although recent economic data shows inflation still running below the Fed’s desired 2% target on a year-over-year basis, it is not far off. In fact, the worry now is that with full employment and strong GDP data, inflationary pressures could easily exceed desired targets and become problematic.

 

The economy may already be overheating, and the Fed may be forced to act more aggressively as it looks to normalize monetary policy. Such a scenario presents several problems. Excessive inflation increases the costs of everyday goods and services, as it erodes purchasing power. Not only that, but higher inflation and a weaker dollar also eat away at real returns. On the other hand, if the central banks raises rates higher and/or faster to combat inflationary pressures; stocks could be in for a rough ride. Higher rates make bonds more attractive, and investors could elect to shift capital away from the aging and arguably overvalued bull market in stocks into fixed income which carries less risk.

 

The current headwinds being faced by equity markets could be very bullish for gold and other hard assets. The gold market could see substantial inflows as investors seek its perceived safety and look to diversify away from stocks and risk assets. The notion of rising inflation could also fuel sizable allocations into the metal, as it may potentially provide a meaningful hedge against a weaker currency and declines in purchasing power.

 

The perfect storm of rising inflation, higher rates, a return of stock market volatility and the current geopolitical backdrop could send gold not only back to all-time highs near $2000 per ounce, but could also drive a rally that goes far above and beyond making $3000, $5000 or even $10,000 per ounce not only feasible but a distinct possibility.

 

Years and years of ultra-low rates and quantitative easing have backed central banks into a corner. As asset values come back down to earth, and as central banks look to shrink balance sheets and normalize monetary policies, market volatility may increase while equity market returns decline. As central banks now battle rising inflation, any large missteps could not only exacerbate such issues but could also send risk assets into a major tailspin.

The Week Ahead In Gold

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Has the first domino now fallen? Are stocks headed towards a full-blown correction? Could a bear market now be in store? These are just a few of the questions investors may be asking themselves right now. Monday’s stock market route following last week’s declines would seemingly indicate that yes-a stock market correction is likely underway.

 

On Monday, the Dow Jones saw its largest point drop in history, and at one point had declined by a whopping 1600 points. Along with the stock selling came a strong increase in volatility, with the CBOE’s VIX jumping over 115%. The question may be: Is recent volatility here to stay?

 

Stock investors are grappling with a variety of issues right now that could fuel further selling. The notion of rising bond yields, increasing inflation and uncertainty surrounding the new Fed Chair are all likely playing a major role in recent stock action. It seemingly got started with last Friday’s strong jobs data.

 

While the number of new jobs added last week was nothing spectacular, what was particularly noteworthy was the increase in wages of 2.9 percent year-over-year, the largest rise in over 8 ½ years. Although wage growth still falls short of the 3.5 to 4 percent that many economists feel is indicative of a robust economy, it does signal rising inflation.

 

Investors have been getting increasingly anxious as inflation looks to be gearing up. Higher inflation can not only increase the costs of everyday goods and services, but can also eat away at real returns. In order to combat increasing inflationary pressures, the Fed could be forced to become significantly more aggressive in its monetary policy. Instead of three hikes in 2018, it is possible that four hikes could be seen, or that the Fed could elect to hike by a half point rather than a quarter point.

 

Although the economy may be heating up-and perhaps even already overheating-a strong economy does not necessarily mean a strong stock market. In fact, if the Fed looks to start applying the brakes through higher interest rates, the bull decade-old bull market in stocks could very well falter. The reversal in stocks may not be orderly, either. In fact, the last few days have shown what can happen as investors look to exit the market in droves.

 

As the risk of inflation continue to rise, bond yields may also continue to climb-and stock investors will be watching. The benchmark ten year note yield recently hit 2.85%, before backing off on Monday as risk aversion fueled buying in bonds. The note does, however, appear poised to challenge the 3% level, and sustained trade at that level or beyond may be enough to pull significant capital from stocks into bonds. Interest rates could be at the beginning of a long bull market, just as the stock bull market fizzles out.

 

A 3% yield is a 3% yield, however, and return-hungry investors will likely seek out alternative assets classes in which to put capital to work. If current trends continue; gold and other hard assets that may potentially provide a hedge against inflation and a decline in purchasing power could stand to benefit significantly in the months and years ahead.

The Week Ahead In Gold

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Markets have been on the move in recent weeks, and volatility could see some expansion in the weeks and months ahead. There has been very little, if anything, to stand in the way of higher stocks. Markets remain strong, and fresh all-time highs will likely be seen again before things eventually turn south.

 

Stocks have done a good job, thus far, of focusing on the positives while essentially sweeping any negatives under the rug. This trend will not go on forever, however, and in fact could be getting very close to a conclusion. Numerous issues could potentially put the brakes on the ongoing rally in equities, and when the selling finally starts it has the potential to accelerate quickly. In fact, a decline in stocks of 20, 30 even 40 percent or more cannot be ruled out.

 

One potential clue that such an inflection point may be on the horizon is the notion that stocks have finally entered the “FOMO,” or the Fear Of Missing Out phase. Investors that have stood on the sidelines, waiting for the “big correction” that never came, are finally unable to tolerate the market moving any higher without them. These investors are now jumping into stocks, and recent inflows suggest that there is significant cash that could still be put to work in equities.

 

This could be the beginning of the end…

 

Stocks could now potentially see a strong “melt up” as all of this remaining investment capital finds its way into the market. Another double-digit percentage run higher could be seen in equities before the bottom finally falls out. Markets have a tendency to inflict as much pain on as many people as possible, and it’s usually once every last investor has gotten long.

 

Not only has the market seemingly entered what could be the final phase of the current bull market, but numerous outside influences could also play a role in a major reversal in stocks and risk assets. The geopolitical landscape remains a potential powder keg. The recent U.S. tax cuts may not have the anticipated effect on the economy. The U.S. Federal Reserve could get more aggressive with monetary policy. Credit is tightening. The list of potentially bearish issues cannot be disregarded indefinitely, and at some point they could weigh heavily on equities.

 

Some investors seem to have seen the writing on the all and are paying attention. The potential for a major shift in market dynamics, including a possible reversal or even collapse in equities along with a weaker dollar, has likely played a major role in gold’s recent upside. This trend may not only continue, but could quickly pick up speed if there is a sudden and severe increase in stock market volatility.

 

Recent price action suggests that stocks could be nearing the end of the current bull market just as gold gets ready to embark on what could be an extensive run higher. The warning signs are there in plain view. It’s up to you whether or not to heed the warning.

The Week Ahead In Gold

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The gold market has a number of things going for it currently that could make recent upside more sustainable. The potential for rising inflation, a weaker dollar and ongoing geopolitical tensions are just a few of the issues that could keep the gold market on the offensive.

 

The shutdown of the U.S. Government on Saturday could also have a significant impact on prices this week. Although many seemed to believe that it wouldn’t come to this, U.S. lawmakers were unable to come to an agreement to keep the government funded beyond Saturday. The shutdown affects numerous areas of government, although several key responsibilities such as military readiness and air traffic control will be maintained.

 

The U.S. Government was last shutdown five years ago, and it took two weeks for a funding deal to be reached. During that time, thousands of federal workers were furloughed, and many government services ground to a halt once they ran out of operating cash.

 

The inability of Republicans and Democrats to make a deal will likely add to already-increasing anxieties over the willingness of both parties to work together on key issues. Both sides have stood their ground thus far over the weekend, and it appears that a deal may not be seen anytime soon.

 

The potential for a shutdown took the dollar lower last week, with many traders apparently looking to put on a “just in case” trade.

 

The potential effects of an ongoing shutdown could be significant for the greenback, which remains near three year lows. The dollar has been trending lower in recent months, and could potentially see another sharp decline below longer-term support. Further dollar weakness could keep gold buyers very motivated, and the metal may also benefit from an increasing flight to safety mentality.

 

This week could be an interesting one, with rising market volatility and increasing levels of investor uncertainty. Oddly enough, stocks finished the Friday session sharply higher, although that may have been due to optimism over a deal being reached to avert the shutdown. This week could see a very different attitude towards equities and risk assets, and investors will be looking for progress in the funding negotiations. Without it, a risk-off scenario could lead to a stock market sell-off, with investors seeking alternatives or even parking cash on the sidelines.

 

The shutdown will also delay the release of key pieces of U.S. economic data, effectively leaving investors in the dark. Although the economic effects of the shutdown may be relatively muted, the longer it continues the more serious those effects could potentially be.

 

Gold did see an end to its five-week winning streak last week, but this may actually be healthy for the market. Prices had seen some rapid acceleration to the upside, and a little back-and-fill-price action could set the stage for another surge higher. Ongoing U.S. political issues along with rising inflation are likely to keep the market on firm footing. That being said, investors will likely step in to buy any significant dips unless proven otherwise. 

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The Week Ahead In Gold

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As the 2018 trading year gets into full swing, many markets are simply picking up where they left off the prior year. Stocks, in particular, continue to climb and seemingly rise each day with little effort. In fact, the stock bull market is a decade old at this point, and you have to wonder if the ease with which the market keeps ascending should be a cause for concern.

 

Stock market volatility remains stubbornly low, and investors may very well be feeling overly confident at this point. Although the market may not have yet reached a full-on state of euphoria, it could be getting close. Further gains in stocks may attract anyone left waiting on the sidelines for a significant pullback, as the pain of missing out on the rally becomes  too much to take. Once that point is reached (and it could be sooner rather than later), stocks could become extremely vulnerable to what could potentially be one of the greatest crashes of all time.

 

Recent strength in gold and silver would seemingly indicate that at least some investors are recognizing these risks, and are looking to take proactive steps in adding portfolio diversification for changing market dynamics that could be seen in the year ahead.

 

Of particular note is the fact that gold has, thus far, remained on the offensive in spite of rising treasury yields. A Federal Reserve official even suggested recently that the central bank may have to take more aggressive action to slow things down. New York Fed President William Dudley was quoted in an article from Marketwatch.com this past week, saying the Fed may have to “press harder on the brakes” in the next few years, potentially increasing the risk of a hard landing.

 

Mr. Dudley also discussed the recent tax legislation that was passed in the U.S., and was quoted as saying “While this does not seem to be a great concern to market participants today, the current fiscal path is unsustainable.” He added that projections from the Congressional Budget Office see debt servicing costs more than doubling by 2027.

 

Mr. Dudley’s comments highlight two major issues that could be a significant driver of higher gold in the years ahead, and the issue of exploding deficits and rising debt is likely to gain considerably more attention in 2018 and the years ahead.

 

The dollar has been moving lower, and the debt issue is without question a major driver of dollar weakness. The greenback is poised for further downside, and gold may potentially benefit from the weaker currency. Consumers may even begin to feel the pinch from a weaker currency, as purchasing power takes a hit and everyday goods and services become relatively more expensive. This may also boost interest in hard assets like gold, which may potentially offer a meaningful hedge against declining paper money values.

 

The potential for a stock market collapse or reversal, and rising debt are two of the major themes that could fuel a significant rally in gold and other hard assets. Both of these themes could be characterized as being unsustainable, and could lead to widespread market volatility and risk aversion. 

 

The Week Ahead In Gold

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The gold market got out of the gate with a nice head of steam to kick off 2018, and the market is showing some significant signs of strength. Gold may, however, be slightly overbought in the near-term, and a pullback is a possibility before the recent trend higher resumes.

 

Investors have been flocking to gold as the New Year gets under way, and that has been seen not only in the physical market but in other markets as well. The world’s largest gold-backed ETF, known as SPDR GLD, recently had quite the winning streak. In fact, GLD rose 11 consecutive days before the winning streak was finally snapped with declines last Wednesday. This represents the longest win streak for the ETF in its history, and more gains could potentially be on the horizon.

 

While we believe that the only real way to harness the power of gold is to buy and hold the physical metal, the strong start for GLD could point to more upside ahead for the yellow metal.

 

As 2018 gets under way, investors seem to be growing increasingly concerned with a number of potential issues that could warrant diversification with gold and a more cautious approach to investing. While this list is by no means complete, some of the major areas of concern for investors in the months ahead may include:

 

  • The potential for rising inflation
  • The North Korean conflict
  • Domestic politics in the U.S.
  • Exploding U.S. deficits
  • The potential for the end of the bull market in stocks
  • A weaker dollar

 

These and other issues have been largely shrugged off by investors for quite some time, but how much longer they can simply be “swept under the rug” is a significant question.

 

Market volatility has been essentially non-existent for a very long time now, and stocks have not seen a major pullback in years. Could 2018 be the year that volatility rears its ugly head once again? Quite possibly, and it seems that many forward-thinking investors are taking steps now to try to insulate their portfolios from a return to more historical levels of volatility.

 

A large spike in selling and volatility could arise from a variety of possible catalysts. Just look at how the markets behaved when Michael Flynn pled guilty in the Robert Mueller investigation or how they have reacted, at times, to further missile tests by North Korea.

 

Whatever the primary driver may be, a major sell-off could potentially have a domino effect, and investors could go running for the exit signs in droves. This could be accompanied by a substantial increase in the VIX or other measures of market volatility, and stocks could see a large portion of gains made in recent years wiped out in a hurry. As the old saying goes: “Markets like to take the stairs up and the elevator down.”

 

Equities seemingly become more and more vulnerable by the day, and it may not take much to set a significant sell-off or market reversal in motion.  Given the rising geopolitical and stock market risks, the gold market, however, may simply be at the beginning stages of a multi-year protracted bull market that could see prices challenge or exceed previous all-time highs. 

An Outside-of-the-box Forecast

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There is the opportunity for be two competing themes for the Canadian economy into 2018. The first, and perhaps favored is that a strong US economy will benefit a slightly lagging Canadian economy in the year ahead. Moderating economic growth in Canada follows a year of robust, G7 leading performance. Further, interest rate hikes south of the border will be witnessed in accordance with a robust domestic US economy benefiting from one of the largest corporate tax rate cuts since the Reagan administration.

 

Alternatively, the Canadian economy will advance on its own merits once again with the best job growth since 2002, and the lowest jobless rate since 1976, which will see the momentum ending 2017 carry forward into the new year. For the Canadian-US dollar exchange rate, it seems that the first half of this year could prompt a range bound tug of war for whichever economy is outperforming the other.

 

Since the 19th of December, the Canadian dollar has advanced over 3 per cent. Commodities quietly seem to be a significant part of the story. Since 2014 and a bear market in commodity prices led by a downturn in crude oil markets, the story has been one of abundances. Stockpiles of raw materials and surpluses of oil in storage buffered any demand shocks. As US oil inventories sit 20 per cent below their March high, one analyst commented this week following the protests and unrest in Iran that geopolitics haven’t impacted the oil markets in a sustained manner over the past three years, and that tide could begin to change.

 

Like Canada and other G7 nations including Europe and Japan, China and other emerging market economies saw a significant rebound in 2017. As a result, the MSCI Emerging Markets Currency Index is at its highest level since May of 2013 because of a strengthening backdrop in Asia. As the global economy is on track for its strongest year since 2011, the picture of a renewed manufacturing boom portrayed by positive economic surveys and increased demand for raw materials is another positive supportive for the loonie.

 

To revert to the consensus forecast, we will likely see the US economy as the leader in 2018. The question, however, is one of a transitory boost to economic growth versus the notion of sustainability. The corporate tax rate reduction to 21 per cent will be supportive for corporate earnings in the US and specifically more so for companies with greater exposure to the domestic economy. The sustainability question though is raised over whether congress will go into deficit control and the forthcoming debate over entitlement programs, which will likely shape the conversation around midterm elections in November.

 

Hence, we have a tug of war. Already forecasts for the Bank of Canada’s first interest rate hike is moving forward in 2018. The Fed is then due to up US rates in March. But the rationale for rate hikes could be the surprise in 2018. Instead of lifting rates with a strengthening global economy, and fitting with the commodity story are inflationary pressures, at which point interest rate hikes from central banks remain necessary, but risk becoming restrictive to economic growth.

 

As the New Year provides an opportunity to regroup and hypothesize themes for what’s ahead, certainty and complacency fit with a status quo risk-on investment environment. If something outside-of-the-box was to disrupt that, central bankers going on the offensive (increasing interest rates ahead of inflation) could be just that for 2018.

The Week Ahead In Gold

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The gold market is kicking off 2018 with a bang, as the market seeks to move further away from previous resistance. The dollar index continues to slump in early trade, and has pushed the gold market to a multi-month high. Although there are a variety of issues that could affect gold prices in the New Year, a weaker dollar is likely to be a theme that is revisited often.

 

As the New Year gets under way, investors may start moving some capital around as they look to rebalance. Given the current geopolitical backdrop and significant stock market risk, gold and other perceived safe haven assets could potentially see substantial inflows, and the recent rally in gold could continue.

 

The dollar index had a very poor showing in 2017, declining by some 10 percent. This was the largest yearly loss since 2003, and the first losing year since 2012. The notion of higher rates and tax reforms has not provided an anticipated boost to the currency, and it may remain on the defensive as worries over the deficit increase and as other key currencies move away from ultra-accommodative monetary policies. The dollar index is on shaky ground from a technical perspective as well, and is in danger of seeing another substantial drop based on chart selling.

 

Although the dollar could be a major driver of gold in the New Year, investors may also pay very close attention to the stock market.

 

Whether or not 2018 is the year the stock market rally finally comes to an end remains unclear, although the possibility is definitely worth considering. Stocks have been moving higher for a decade now, to the tune of a couple hundred percent. That rally, however, has been built on a house of cards of ultra-low interest rates and quantitative easing. The Fed has already done away with QE (at least for now) and is now in the process of attempting to normalize monetary policy. The central bank has penciled in three rate hikes this year, and seems to be building a case for higher rates in general.

 

The Fed has spoken of more aggressive policy before, however, and elected to sit tight. If the central bank does take a stronger approach, however, it could have dramatic effects on the stock market. In fact, rising rates could eventually be the final straw for the stock rally. Higher rates would make other asset classes, such as bonds and notes, more competitive and could fuel a decline in corporate profits as borrowing becomes more expensive. The market could finally see a good, old-fashioned correction-or worse-a major sell-off followed by a lengthy bear market.

 

These risks may keep the Fed walking on eggshells, and the central bank is likely to stay on a cautious and gradual path towards higher rates.

 

Picking up where 2017 left off, the New Year is also likely to be full of geopolitical issues that could have sweeping effects on global financial markets. The U.S. and Canada have multiple challenges to grapple with, with the North Korean nuclear threat being at the top of the list. Ongoing geopolitical conflicts may also keep a floor under gold prices, and could underpin a significant rally in the metal should tensions escalate further.

 

The gold market has a number of tailwinds currently, and recent activity would suggest that prices could be headed significantly higher. In fact, 2018 could be the beginning of a protracted bull market in gold that could see a challenge of previous all-time highs or beyond.

The Week Ahead In Gold

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The gold market is kicking off 2018 with a bang, as the market seeks to move further away from previous resistance. The dollar index continues to slump in early trade, and has pushed the gold market to a multi-month high. Although there are a variety of issues that could affect gold prices in the New Year, a weaker dollar is likely to be a theme that is revisited often.

 

As the New Year gets under way, investors may start moving some capital around as they look to rebalance. Given the current geopolitical backdrop and significant stock market risk, gold and other perceived safe haven assets could potentially see substantial inflows, and the recent rally in gold could continue.

 

The dollar index had a very poor showing in 2017, declining by some 10 percent. This was the largest yearly loss since 2003, and the first losing year since 2012. The notion of higher rates and tax reforms has not provided an anticipated boost to the currency, and it may remain on the defensive as worries over the deficit increase and as other key currencies move away from ultra-accommodative monetary policies. The dollar index is on shaky ground from a technical perspective as well, and is in danger of seeing another substantial drop based on chart selling.

 

Although the dollar could be a major driver of gold in the New Year, investors may also pay very close attention to the stock market.

 

Whether or not 2018 is the year the stock market rally finally comes to an end remains unclear, although the possibility is definitely worth considering. Stocks have been moving higher for a decade now, to the tune of a couple hundred percent. That rally, however, has been built on a house of cards of ultra-low interest rates and quantitative easing. The Fed has already done away with QE (at least for now) and is now in the process of attempting to normalize monetary policy. The central bank has penciled in three rate hikes this year, and seems to be building a case for higher rates in general.

 

The Fed has spoken of more aggressive policy before, however, and elected to sit tight. If the central bank does take a stronger approach, however, it could have dramatic effects on the stock market. In fact, rising rates could eventually be the final straw for the stock rally. Higher rates would make other asset classes, such as bonds and notes, more competitive and could fuel a decline in corporate profits as borrowing becomes more expensive. The market could finally see a good, old-fashioned correction-or worse-a major sell-off followed by a lengthy bear market.

 

These risks may keep the Fed walking on eggshells, and the central bank is likely to stay on a cautious and gradual path towards higher rates.

 

Picking up where 2017 left off, the New Year is also likely to be full of geopolitical issues that could have sweeping effects on global financial markets. The U.S. and Canada have multiple challenges to grapple with, with the North Korean nuclear threat being at the top of the list. Ongoing geopolitical conflicts may also keep a floor under gold prices, and could underpin a significant rally in the metal should tensions escalate further.

 

The gold market has a number of tailwinds currently, and recent activity would suggest that prices could be headed significantly higher. In fact, 2018 could be the beginning of a protracted bull market in gold that could see a challenge of previous all-time highs or beyond.