The Week Ahead In Gold

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Both the stock market and the gold market had a strong first quarter to begin the New Year. As we get deeper and deeper into the Trump Presidency, however, things may not look quite as rosy as they did a few short weeks ago.

 

It’s no secret that the rally in equities and risk assets over the last several months has been built on the notion of major tax reforms and massive fiscal spending. The promise of returning manufacturing jobs to the U.S. and looking to improve trade deficits has also been a factor in the stock market’s ascent.

 

That ascent in equities has potentially run its course, however. There are numerous economic and geopolitical issues on the horizon that could potentially lead to a significant shift in investor sentiment and a corresponding spike in market volatility.

 

Although there are numerous things that have the potential to fuel volatility and make investors anxious, here are a few of the major ones that could potentially shake global financial markets and fuel demand for safe haven assets such as gold and other metals:

 

Trump’s tax reforms may not see the light of day: The Trump administration’s tax cuts are already running into a wall of resistance. Massive tax cuts combined with a significant boost in defense and fiscal spending leads to higher deficits. After the Trump administration was not able to put together a vote to repeal the Affordable care Act, investors may begin to doubt its ability to pass other key pieces of legislation. Markets have moved sharply higher on the idea of tax cuts and more spending, and if this does not come to fruition they will have to adjust which could lead to volatility and sharply lower stock prices.

 

Here comes the debt ceiling again: The continuing resolution that prevented a government shutdown is set to expire at the end of April. The debt ceiling could potentially become a major source of partisan bickering. The idea of an agreement not being reached and the first ever U.S. default could potentially send shockwaves through global financial markets. If the debt ceiling is raised, the nation is still adding to its already enormous debt load. Either way, the ceiling could fuel significant demand for gold and other perceived safe haven assets.

 

North Korean saber rattling: It is certainly no secret that tensions between the U.S. and North Korea have been on the rise. Ongoing provocations by the North Korean Government have not gone unnoticed, and the U.S. has said that it is willing to take unilateral action against the nation if necessary. As the country becomes more advanced in its nuclear capabilities, the issue becomes more and more urgent. The U.S. would undoubtedly prefer to have China’s support in any efforts against North Korea, and this week’s meeting between President Trump and Chinese leader Xi Jinping may be very significant.

 

All of these issues have the potential to be a major catalyst for market volatility and lower stock prices. They also have the potential to fuel what could be a major rally higher in gold and other perceived safe haven asset classes. The next few weeks could become very interesting, and could see a dramatic shift in investor sentiment.

The Week Ahead In Gold

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The gold market is on considerably stronger footing and could potentially be poised for further upside. The market is set to challenge its late February highs, and an upside breakout could potentially see a fresh leg higher in price.

 

The yellow metal has a number of things working for and against it currently. The bulls, however, are winning the tug-of-war. Political uncertainty has been a factor in gold’s recent ascent, and Friday’s non-vote on the Trump administration’s bill to repeal the Affordable Care Act will likely fuel further risk aversion.

 

The Republicans were set to vote on the proposed legislation on Thursday, but were forced to postpone as they lacked the necessary votes. As the day progressed on Friday, it was seemingly becoming more and clearer that the party still did not have the votes necessary to vote on the bill.

 

The bill was eventually pulled in what many are calling a major defeat for the Trump administration. The failure to pass this legislation could be extremely significant, and could have a major effect on the administration’s ability to get other parts of its agenda signed into law. In fact, this could potentially call into question the President’s plans regarding tax reforms and fiscal spending.

 

The rally in equities over the last several months has been built on the notion of lower taxes and massive fiscal spending. If it appears that the administration will not be able to follow through on these policies, the stock market could potentially reverse course in a major way.

 

The gold market may also be getting a boost from a more dovish-sounding Fed. The central bank recently raised the Fed Funds rate by a quarter point in a move that was expected. The bigger question, however, was whether or not the Fed would make any changes to its forecast.

 

Following several weeks of hawkish rhetoric from various Fed officials, the central bank did not make any changes to its forecast, and still has three rate hikes penciled in for 2017 followed by another three rate hikes in 2018.

 

There had been some widespread discussion of a fourth rate hike this year, but the central bank stuck to its previous plans. This may have been a sigh of relief for the metals markets, and it has also had a negative impact on the dollar index.

 

The gold market will be paying close attention to stocks and the market’s overall reaction to Friday’s non-vote. Concerns over the Trump administration’s ability to move forward with its agenda could begin to weigh heavily on stocks. With the bull market really aging at this point, a minor correction in equities could quickly turn into a much larger pullback. Should stocks begin to falter, much of that investment capital could find its way into alternative asset classes, and gold could potentially stand to benefit.

 

Changes in investor sentiment and an improving technical posture could fuel further near-term upside in gold. A weakening dollar, stock market volatility and falling rates may also add to the metal’s allure. 

Forgotten Volatility

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There is certainly no shortage of market impacting stories on a weekly if not on a daily basis. It marks quite the difference from years past where discussion surrounded the US Federal Reserve and central bank policy being the only game town. Over the course of the last week there were details unfolding around a terror incident in London, President Trump’s push to begin the process to repeal and reform Obamacare, or even in Canada, a federal government two years into its mandate of creating a feel-good story of investing in infrastructure and ensuring a fairer economy (by their definition).

 

The ongoing challenge for those navigating these markets is deciphering through the noise. From the media’s perspective, and without questioning their bias, what we are witnessing is Trump’s ability to govern over these next four years. Just last week presented the opportunity for healthcare reform, on which he campaigned extensively and promised to immediately repeal, and the question if this is whether it’s a bellwether for other Trump reforms and legislation.

 

This is why the talk in this weekend’s press surrounds the need for a Republican coalition in order to govern. From that perspective, it seems comical how quickly everyone had forgotten the challenges Obama faced in his first couple years in office despite also having majorities in both Congress and the US Senate.

 

It’s also worth questioning whether the risk appetite of investors is so closely tied to the performance of the man in the White House. Despite being the headline news story for the past five months, there are other themes that were driving investment into the US dollar and US assets in the lead up to the election. We can surmise that Trump acted as a catalyst for some bullish moves higher in US equities, but I think it’s worthwhile to take a wait and see approach before we tie his performance to potential downside in the markets.

 

To give perspective, the S&P500 hasn’t fallen by greater than 1 per cent since October 11th, 2016. The volatility that used to be prevalent during the climb from the market depths of the 2008-2009 Great Recession is absent. There have only been 8 instances in the last year where the S&P500 fell by greater than one per cent in a day. Whether looking across Europe or the US, equity volatility remains muted and, that is why a one per cent decline might lead to a little excitement. 

 

To digress, there is also evidence to suggest higher levels of complacency. ZeroHedge put out a piece this week that illustrated valuations and earnings ratios that highlight how these markets may be a little stretched. This alone could tell us that risk in these markets may be underpriced. 

 

Eight years on, there have been a number of stories to explain the strength or moves higher in the markets since the March 2009 low. Ultimately, there are a number of fundamental stories that could be put together to give a bullish or bearish outlook to the markets. My longer term take continues to maintain the theme of a stronger US dollar in search of relatively higher returns. If this is the case, Trump’s ability to govern (or lack thereof) could be no more than a speed bump. 

The Week Ahead In Gold

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The gold market has seen a nice bounce in recent action, recovering much of the losses seen in recent weeks. The gold market tested the $1200 per ounce level, and found willing buyers. Now around the $1230 level, the gold market is about $35 per ounce from its recent highs.

 

Perhaps the gold bulls should be thanking the Fed. After a significant amount of more hawkish rhetoric from the Fed, the central bank this past week struck a different tone. The central bank did raise the Fed Funds rate by a quarter point in a move that was totally expected. What may have caught some investors off-guard, however, was the dovish tone surrounding the announcement on monetary policy.

 

After data showing rising inflationary pressures and a strong labor market, Fed officials began talking up rate hikes, essentially letting markets know that a March hike was coming. Numerous central bank officials have commented in recent weeks on the outlook for rates and the economy, and it left the impression that there was a good possibility that the central bank could become more aggressive with rates as it looks to normalize monetary policy.

 

Last week, however, the Fed stuck to its previous forecast of three rate hikes in 2017 and three in 2018. Although the Fed has said that the Trump administration’s plans do not factor into its decision (at least not directly), it does seem as if the central bank is interested in seeing what effect any potential tax reforms and fiscal spending may have on the economy.

 

The slow and steady approach towards tightening reiterated by the Fed seemed to be music to the ears of the gold bulls.

 

Lacking any fresh bullish catalyst, it remains unclear how high gold may go from current levels. Gold may see ongoing interest if inflationary pressures continue to gather steam. As long as equities continue higher, however, the gold market may see only limited upside.

 

Stocks have moved higher on the notion of significant tax cuts and fiscal spending, although neither of these policies has been implemented yet.  Investors have been patient thus far, but it remains to be seen just how far that patience will go.

 

Some might argue that the bull market in stocks is getting very long in the tooth, and that the chances of a recession are increasing. If the stock market begins to falter, it could potentially keep the Fed less motivated to hike rates while also fueling capital flows into alternative asset classes.

 

A major stock market breakdown could potentially be like throwing gasoline on a smoldering campfire, and could see the price of gold move significantly higher from current levels.

 

Gold may also see support from ongoing geopolitical risks. The Trump administration has had its share of controversy already, and it seems that the administration is always one misstep away from a major international incident.

 

The administration could make or break the markets in the coming months. A massive fiscal spending package may fuel growth and inflation and send stocks even higher. If the administration is not able to deliver, however, markets could head sharply south in a hurry.

 

Gold may potentially find itself in a position to benefit either way. 

The Week Ahead In Gold

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The gold market is trying to find its footing after seeing a significant slide in recent days. Since hitting nearly $1265 per ounce at the end of February, the gold market went into a tailspin, losing significant ground in the process. The market traded lower for several consecutive sessions before finding some more buyers around the $1200 level.

 

On Friday, the U.S. Department of Labor and Statistics reported that the U.S. added 235,000 jobs in February while the unemployment rate dipped slightly lower to 4.7 percent. The 235k figure was well above consensus estimates of 200,000. There was also an upward revision to January’s figures.

 

This strong jobs report has essentially sealed the deal for an interest rate hike from the Fed when it meets later this week. Although a hike this week appeared to already be a foregone conclusion, this jobs data should erase any shred of doubt.

 

How the gold market will react remains unclear.

 

The gold market likely did not price in a March rate hike from the central bank, and that is almost certainly a major factor in gold’s recent downside.

 

With a significant amount of hawkish rhetoric coming from various Fed officials, investors will pay close attention to the Fed announcement on monetary policy.

 

The Fed recently indicated that it had penciled in three rate hikes this year. Market participants seemed to have their doubts, and this really came as no surprise given the central bank’s reluctance to raise rates last year.

 

Now the question doesn’t seem to be whether or not the Fed will hike rates three times this year. A better question may now be whether or not the Fed will have to hike four times.

 

If the Fed is in fact behind the curve, it could catch markets off-guard. Although gold may see further selling on more aggressive monetary policy, stocks could also potentially see some significant selling pressure. If equities were to enter correction or bear market territory, capital could flow out of equities and into alternative assets like gold.

 

Of course, any policy implementation-or lack thereof-by the Trump administration could also potentially factor into the equation. If investors are left disappointed in any fiscal spending package or if such measures are not started in a timely fashion, selling in equity markets could potentially get under way.

 

Any major controversies surrounding the Trump administration could also potentially factor into the Fed’s plans as such issues could send markets and risk appetite sharply lower.

 

For the time being, the gold market does not seem to have a lot working in its favor. Interest rates are on the rise, the dollar index is moving back towards previous highs and stocks remain strong. Risk appetite and economic optimism are running high. Thus far, there are no signs of stocks and risk assets reversing course.

 

In the absence of any fresh, bullish catalyst, the gold market could see ongoing price pressure. The coming weeks could, however, provide some significant buying opportunities for the long-term gold investor. 

The Week Ahead In Gold

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Although gold has backed off from its recent highs, the uptrend seen in the yellow metal since the first of the year remains intact. Although the gold market has likely seen some benefit from uncertainty surrounding the Trump administration and implementation of its policies, the yellow metal may face some significant headwinds in the coming weeks.

 

Gold investors may have a hard pill to swallow when it comes to the Fed and interest rates. Just days ago, it was thought that the central bank would almost certainly hold off on any further rate hikes until June. That would give the Fed the chance to see what policies the new administration may be able to put into action, and also how they might affect the broader economy.

 

Recent commentary from Fed Chairwoman Janet Yellen and numerous other Fed officials, however, points to a central bank that is ready to act now.

 

The Fed Chief left little doubt on Friday that the central bank was ready to act this month and lift the benchmark Fed funds rate again. Ms. Yellen said on Friday that if the economy stays on its current rack, a rate increase “would likely be appropriate.”

 

What perhaps caught some investors off-guard was other comments that may be indicative of the central bank being even more aggressive with rates this year than previously thought.

 

The Fed has penciled in three rate hikes for 2017, but given recent economic and inflation data, four would not be a stretch by any means.

 

How this may affect the gold market remains unclear. The next few weeks, however, may be very telling.

 

The notion of rates rising faster than expected may also boost the dollar, which could potentially challenge its post-election highs. A higher greenback could also potentially weigh on the yellow metal in the coming weeks.

 

Looking at the bigger picture, even with multiple rate hikes this year, rates remain historically low. Gold investors may not become too distressed about a Fed funds rate of one or two percent.

 

Although some might argue that Fed tightening is bearish for gold, further rate hikes also have the potential to benefit gold.

 

The stock market has been climbing and climbing and then has climbed some more. Some might argue that stocks are artificially elevated due to ultra-low interest rate policies and QE. It is also important to keep in mind that stocks have been rising for several years now. A recession could also potentially be in the cards in the coming months.

 

If equities finally begin to show signs of cracking, gold could potentially see additional capital inflows. A more aggressive Fed could potentially fuel selling in stocks.

 

The gold market may see some further selling, but prices may not fall too far. There remains a degree of risk aversion in the marketplace that won’t seem to go away. The Trump administration continues to deal with an image problem, and there are still calls for an investigation into possible ties to Russia.

 

These issues are not likely to be swept under the rug, and could potentially fuel ongoing buying in gold with or without further rate hikes from the Fed.

 

In the meantime, a March rate hike from the Fed may provide a decent test of the gold bulls’ resolve. The absence of any significant selling could potentially be construed as an underlying sign of market strength.

Fed Watch

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There was a sentiment shift in the markets this week. Following a speech from Federal Reserve Chair Janet Yellen in Chicago on Friday, and other Fed governors and speakers leading up to her, it now seems with more certainty there will be an interest rate hike announced at their meeting on March the 15th. Investors are pricing in a near 80 per cent probability that they will do so, (and it can be tracked here). In the short period between January 25th 2017, and the 1st of March, the Dow traded from 20,000 all the way to 21,000. With nothing standing its way, except the old adage that bull markets climb a wall of worry, the first obstacle for the exuberance of these US equity markets has presented itself. Within two weeks, we’ll see what, if any, challenges the Fed decision presents.

    

The US Federal Reserve cannot risk being behind the curve when it comes to raising interest rates. The rationale for this is simple. If they don’t raise rates when they are able, it’s unknown what extraneous event will prevent them from doing so in the future in this risk prone world. And in fact, some of the harsher critics of the US Fed in years past have been the ones that take issue with when they failed to raise interest rates. One example was not raising rates in September 2015, when heightened market and economic uncertainty throughout the remainder of that year nearly kept them on the sidelines despite an improving US economy.

     

Outside of the domestic US economy, last year’s focus seemed to be as much on international events such as Brexit. To date, the impact of Brexit on the North American economy has been minimal; moreover, it did hinder the Fed from raising rates last summer and unsettling what were already vulnerable markets. In hindsight, the sentiment around the lead up to Brexit fits even more with ‘the wall of worry’ scenario impacting the equity markets.  However, what other reaction would one expect from herd mentality, or even rational investors, who are experiencing an unknown event for the first time that deviates from what might be considered the status quo.

       

It is simply for the reason of being able to raise rates that we could see the Fed act as soon as March, and investors can and will take that as the much criticized and analyzed institution not wanting to fall behind the curve. For the markets, this may be a positive. While many had questioned their ability to “remove the punchbowl” from the party, meaning eventually raising rates, these minor rate hikes have been so gradual they do not yet look to stand in the way of the advancing equity markets.

The Week Ahead In Gold

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The gold bulls are in firm control as prices are poised to extend the recent rally. The gold market has seemingly hit its stride even as stocks continue their rally into fresh all-time highs. The notion of gold rising along with stocks, while not extremely unusual, does beg some questions. Notably, what might be driving some degree of risk aversion that is clearly in the marketplace.

 

Investors are thus far giving the Trump administration the benefit of the doubt, although at some point the stock bulls’ resolve may be tested. The idea of significant tax reforms expected in the near future along with a massive fiscal spending plan (also expected in the near future) has kept risk appetite on the high side. Those plans have thus far, however, been very lacking in pertinent details.

 

Investor patience on these fronts may eventually become stretched given many of the potentially negative headlines surrounding the new administration. In fact, geopolitical risks would seem to be the primary driver behind gold’s recent upside.

 

The Fed is also doing a good job keeping investors guessing on the interest rate front. Recent data has pointed to increasing inflationary pressures and ongoing improvement in the economy. Fed Chairwoman Janet Yellen has, however, not committed to any specific timeline for hiking rates further. Recent data along with some hawkish commentary from various Fed officials has raised the prospects for a March hike, although June still seems to be the most likely target for the next hike from the central bank.

 

The Fed also seems reluctant to begin tightening too fast too soon given the unknowns surrounding Trump administration policies. It is entirely possible that the central bank would prefer to hold off on further tightening until it has more details about Trump’s fiscal spending plans and their potential economic impact.

 

Over the next couple weeks, the February jobs report is likely the most significant piece of economic data set for release. Whether or not a very strong jobs report is enough to motivate the Fed to act in March is unclear.

 

Investors may also pay particular attention to bonds and notes in the coming weeks. Interest rates have thus far not been able to move beyond the post-Trump election victory highs, and have actually been declining again in recent trade. This is another mixed signal that investors have to contend with. Further strength in the sector may also be indicative of increasing risk aversion. Bonds and stocks are not likely to rise together for very long, and at some point something will have to give.

 

If the equity market begins to show signs of topping out, it could give gold investors yet another reason to keep buying and keep the rally going. A sizable reversal in stocks could also send fresh capital flows into gold and alternative asset classes.

 

Until more clarity is seen on numerous issues including the Trump administration’s plans and the Fed’s trajectory on rates, the path of least resistance in gold is likely to remain higher and any significant dips in gold may be aggressively bought. 

Higher, Higher, and Higher

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Bank of America Meryl Lynch put out an interesting piece of research this week raising alarm bells over a potential déjà vu in the financial markets. The recipe of a run up in stock prices led by financials, tightening of credit spreads, declining volatility, and a decline in real interest rates where all factors that preceded the “taper tantrum” in the US in 2013 and the German bund “tantrum” of 2015. In both these instances, whether fundamental reasons were because of the US Federal Reserve paring back their asset purchases or anticipating inflation in the EU, significant moves higher in yields were witnessed.

 

Since Trump’s inauguration, now 5 weeks into his presidency the S&P 500 is up 4% and both the Dow Jones Industrial Average and NASDAQ are up over 5%. As many begin to question the stability of this rally as US equity markets have already matched the average year-end forecast of analysts surveyed by Bloomberg, others are left wondering whether this market has legs.

 

While we could begin to see some volatility here in the short term, there are a number of positive factors that lend support to the equity markets through the first half of this year. First, the chatter around the US Fed at the moment is that the likelihood of a March rate hike will be pushed off until June. Second, as recently confirmed US Treasury Secretary Steve Mnuchin told the Wall Street Journal this past week, he sees an overhaul of the US tax system by August. Third, investors continue to anticipate a “pro-business” agenda of the Trump administration and the Republican controlled chambers of the US Congress.

 

Janet Yellen and the US Fed seem to be making their way out of the headlines, which is likely where they’d prefer to be. Since the financial crisis, Federal Reserve officials have made the case for the need of fiscal policy over (or in combination with) ultra-accommodative monetary policy. This includes or commonly alludes to increased government spending on infrastructure projects, which has been perhaps the one amenable proposal of the Trump Administration with the Democrats. That would further take the Fed out of the spot light in the near future. Furthermore, recent headlines have hinted at the disagreeing remarks between the Trump White House and Fed Chair Janet Yellen. The new administration will have influence over appointments in the years ahead, and how that changes the trajectory of Fed policy is ultimately unknown. It’s always been my view their policy decisions were made between a rock and a hard place.

 

The changes to the US tax system, along with proposals to make the US more “business friendly,” (which is as ambiguous as it sounds) are the second and third factors driving investor sentiment. Jack Mintz opined in the financial post this week that Canadian’s should be worried about the Republican Tax plan not because of a border adjustment tax, but because it makes their tax code more competitive and will attract investment. The border adjustment tax is no different in nature than the GST, or any other value-added-tax in place in 150 countries around the world.

 

Certainly equity market valuations seem elevated in terms of how quickly we have moved higher in the recent months. And although accompanied uncertainty may prompt some volatility, the ultimate question is what has motivated this leg higher and whether any of those factors have changed. At this point, the answer seems to be not yet.

The Week Ahead In Gold

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The gold market ended last week not far from recent highs, and the yellow metal looks poised for further gains. The gold market has a few things working in its favor right now, and some key data out of the U.S. last week is seemingly pointing to yet another reason to consider buying gold right now.

 

Last week’s Producer Price Index as well as the Consumer Price Index both showed rising inflationary pressures. The CPI data showed a month-over-month rise of .6 percent, while consensus estimates were looking for a rise of .3 percent. This reading was the highest reading recorded in almost four years.

 

The core CPI data (stripping out volatile food and energy) showed a month-over-month rise of .3 percent, while consensus estimates were looking for a rise of .2 percent.

 

Headline year-over-year CPI showed a reading of 2.5 percent, well above the Fed’s desired target of 2 percent.

 

This stronger than expected inflationary data along with ongoing strength being seen in key economic data could potentially ,motivate the Fed to act sooner rather than later, and could possibly boost the odds of a March rate hike from the central bank.

 

Thus far, equity markets have essentially shrugged off the notion of higher rates, as hopes for major tax reforms and fiscal spending from the Trump administration keep the rally going. A March rate hike could, however, act as a shot across the bow, and stock investors may begin to get a little more anxious if the central bank follows through on a more aggressive stance with monetary policy.

 

Investors for now, however, are still questioning the likelihood of seeing three rate hikes this year. This does make a lot of sense, after all, given expectations for more hikes last year that never materialized. The bond market has been relatively range bound in recent weeks following the initial rump victory sell-off, and the fact that bonds have not broken further would seem to indicate that investors are not overly concerned about an aggressive Fed.

 

Even if the Fed does begin tightening, gold may potentially see ongoing support from rising inflation expectations and a number of geopolitical issues.

 

The Trump administration has seemingly had numerous issues, and more controversy surrounding the administration and its policies is a good possibility. Like the notion of rising rates, investors have thus far been able to shrug off the uncertainty that has been seen since the new administration took office. Investors have their breaking points, however, and at some point those limits may be tested if present trends continue.

 

In a shortened trading week due to the President’s Day Holiday, investors will focus on some key data points including Weekly Jobless Claims, Consumer Sentiment and more. The data highlight of the week, however, will be Wednesday’s release of the latest FOMC meeting minutes.

 

This report could potentially shed further light on the Fed’s assessment of economic conditions as well as its plans regarding interest rates.

 

Gold may challenge its recent highs this week, and the Fed minutes could either fuel a fresh leg higher or possibly put the brakes on gold’s recent rally. If a decent pullback in the yellow metal is seen, investors may simply view it as a buying opportunity.