Gold and silver have been hit hard in recent trade. The question is: Will the bulls be able to stop the bleeding or is there more downside in store?

 

Gold started the week well above the $1300 level, in fact, gold at one point on Monday was trading for over $1320 per ounce. Silver, on the other hand, started the week off trading well above the $19 per ounce level. Then the selling began…

 

Gold and silver were hit hard on Tuesday, with gold falling by over $40 per ounce and silver shedding more than a dollar per ounce. The question is why.

 

Some analysts suggested that some “big player” fund activity may have been to blame, while others even suggested that embattled Deutsche Bank could have something to do with it.

 

The most plausible explanation, in our view, is that some large selling did take place amidst a lack of any fresh bullish inputs.

 

Gold and silver had not been able to carve out new fresh highs in recent months, and the uncertainty surrounding interest rates in the U.S. appears to be abating. The Fed has made it fairly clear that it intends to-and wants to-raise interest rates before the end of the year.

 

This has caused some bumps in the stock market but nothing of any significance yet. Higher crude oil prices have added some bullish sentiment to the equity market, helping to counteract any negativity over a December rate hike.

 

Bond and note prices have been falling as interest rates have been on the rise. The dollar index has also been moving higher as Brexit starts to become more of a harsh reality and the idea of higher U.S. rates takes hold.

 

More Brexit news is likely to become a center of focus for global investors, and investors will continue to watch the data stream in the U.S. Although difficult to imagine at this point, the Fed could still decide to hold off on a 2016 rate hike. It would likely take a major string of very poor economic data or perhaps some type of negative global economic headlines. Extremely unlikely, but still possible.

 

This week, investors will be watching the latest readings on MBA Mortgage Applications, Weekly Jobless Claims, PPI, Retail Sales, Consumer Sentiment and more. There will also be several Fed officials involved in various speaking engagements throughout the week.

 

Gold and precious metals are currently lacking any fresh bullish inputs, and unless some type of catalyst is seen, the metals could potentially remain under pressure. This catalyst could possibly be further negative news about Deutsche Bank, a larger breakdown in equity markets or any more dovish commentary from the Fed or stimulative action by other central banks.

 

Significant declines in “paper” gold or silver can represent fantastic buying opportunities in physical gold or silver. For now, we are of the opinion that sub-$18 per ounce silver represents an excellent value and great buy for the long-term investor. We would also expect gold to be bought at current levels, and for physical buyers to become more and more aggressive if prices decline further. 

Two of the most highly anticipated economic news events for the month have now come and gone, and markets are still trying to make up their minds regarding the potential implications.

 

Last week, the Bank of Japan met regarding monetary policy while the U.S. Federal Reserve also held its monetary policy meeting and subsequent press conference.

 

The BoJ did take action this past week, although the action taken did not come in the form many were likely expecting. Many analysts were of the opinion that the Japanese Central Bank would likely take rates further into negative territory. The bank elected to go down a different path, however.

 

The BoJ, without getting into details, has now unveiled what is being dubbed “quantitative and qualitative monetary easing with yield curve control.”  The BoJ has also committed itself to further easing until inflation overshoots the central bank’s two percent target.

 

The question likely now being asked by many is “Has the Bank of Japan simply run out of ammo?”

 

Of course, time will tell but concerns do seem to be mounting that the central bank is running out of bonds to buy-and that previous easing measures have proven ineffective.

 

The U.S. Fed, on the other hand, elected to hold rates steady although the vote was the closest it’s been in some time.  The doves won by a vote of 7-3, although the central bank appears intent on hiking rates before the end of the year.

 

Perhaps more importantly, the Fed lowered its target Fed Funds rate from three percent to 2.9 percent, and reiterated that the pace of additional tightening would be very slow and incremental. At this point, a single rate hike is expected this year while two are expected next year.

 

The notion of sluggish global growth may keep central banks very accommodative for some time to come, and further easing measures are likely to be unveiled by several key central banks.

 

The initial reaction to last week’s central bank news by the gold market was positive. The bulls will need to see some follow through this week, however, to really regain upside momentum.

 

Investors will be watching the data stream closely in the coming weeks, and the Employment Situation Report for September could potentially make or break the Fed’s plans for a December rate hike.

 

Given the Fed’s lowered economic outlook and the notion of ongoing easing elsewhere, gold and precious metals could potentially see fresh new highs in the coming months.

 

Although stronger equities have likely been a significant roadblock to higher gold prices in recent months, stocks may be more deeply affected by a December rate hike than gold. The coming weeks will demonstrate if the gold market has already completely discounted a hike by the Fed, and if the idea of ongoing easing and slow growth is something the market can build on to put together a stronger long-term rise in prices.

 

Stocks have been showing some signs of weakness in recent trade, and any indications that the equity market bubble may be bursting could potentially drive significant capital inflows into gold, silver and other perceived safe haven assets. 

Stock investors sure didn’t like what they were hearing on Friday. The broad market S&P 500 declined by nearly 2.5 percent, while the Dow Jones Industrial Average was hammered for a loss of over 390 points. Friday’s losses were the worst seen since June 24th in the immediate aftermath of the Brexit vote.

 

While there is certainly a combination of factors at play, hawkish commentary from Fed officials is not doing the stock or bond markets any favors.

 

On Friday, Boston Fed President Eric Rosengren (who is a voter on this year’s interest rate setting board) said the central bank could resume gradual rate increases as economic risks are more in balance.

 

His comments drove buying in the dollar, while the yield on the benchmark 10-year Treasury note jumped to pre-Brexit levels. Crude oil got hammered while gold and silver declined as well-albeit only modestly.

 

It would seem pretty clear that the Fed is perhaps sending a shot across the bow, and that investors should ready themselves for another rate hike. Judging by market action on Friday, stock investors do not appear too pleased with the idea of higher rates.

 

Markets are still only pricing in a small chance of a September rate hike, with Fed Funds futures currently showing about a 24 percent chance of a hike this month. December Fed Funds futures, on the other hand, are pricing in about a 58 percent chance of a hike.

 

All of this could potentially change, however, based on the data stream and other factors. For now, however, the central bank appears to be pretty intent on tightening before the end of the year.

 

Interestingly, gold and silver did not see the aggressive type of selling seen in equities on Friday. In fact, one might argue that these markets have already discounted another hike by the Fed.

 

Although some might consider rising rates a roadblock to higher gold prices, we believe gold could rise substantially from current levels even with incremental rate increases. There are two primary reasons behind this view:

 

1. Rates are not likely to rise substantially anytime soon.
2. The Fed could potentially raise rates only to cut them again later.

 

 

This week may bring with it more clues about the timing of the next hike, and investors as well as the Fed will have some key pieces of data to scrutinize. Retail sales and manufacturing data could potentially influence the central bank, while weekly jobless claims may also play a role.

 

The Fed may, however, focus on the jobs data for September before making a decision. The non-farm payrolls data for August was not a disaster but not exactly stellar either, and the Fed could prefer to see another strong number before tightening again.

 

Stocks, bonds and precious metals may start the week off on the defensive, and any strong economic data or hawkish rhetoric may exacerbate selling in these asset classes. On the other hand, any dovish commentary or significant misses on data could potentially alleviate some rate hike fears.

 

Several Fed officials are speaking Monday, and their commentary could potentially set the tone for the week. 

Last week, the highly anticipated Federal Reserve symposium from Jackson Hole, Wyoming, drove a large degree of volatility in gold and other markets on Friday. Investors had patiently awaited remarks from Fed Chairwoman Janet Yellen and other Fed officials looking for further clarity on the timing and pace of additional interest rate hikes.

 

Did the Fed deliver?

 

Yes and no…

 

It seems to be apparent that Janet Yellen is signaling another rate hike is on the way, but she provided no specific timetable as to when the next hike may take place.

 

Ms. Yellen stated: “I believe the case for an increase in the federal funds rate has strengthened in recent months.” Ms. Yellen also said that she believes the central bank is close to meeting its targets on full employment and price stability, and she described consumer spending as “solid.”

 

Other Fed officials also chimed in, with Atlanta Fed President Dennis Lockhart stating on Bloomberg television that the central bank could potentially hike rates not once but twice this year.

 

On the other hand, St. Louis Fed President James Bullard is sticking with his forecast of just a single rate hike over the next 2.5 years.

 

The bottom line is the symposium will still leave the topic open for at least some debate. Perhaps this is simply a shot across the bow before the Fed does take action. Or perhaps the central bank is looking to maintain credibility by leaving the door very much wide open for a rate hike this year-or even two.

 

Speculation over the possibility of a September or December hike will likely remain the focal point of investor attention in the coming weeks. Any large data points will be heavily scrutinized, with any significant misses in key data releases possibly giving the Fed more to think about before tightening again.

 

On the flip side, stronger than expected economic data could influence the hawkish camp, and the chances of a hike this year could potentially go up significantly.

 

Stocks sold off a bit in the aftermath, while gold and silver ended the session higher but far from the day’s highs. Treasuries saw some decent selling come into the market, while the dollar index rallied sharply.

 

We believe that the fact that gold and silver did not see heavy selling is a very bullish sign. While the Fed alluded to a hike coming sometime in the near future, investors do not appear to be completely convinced. In addition, the reality is that even if the central bank does raise rates, the pace of any further hikes is likely to be extremely slow and incremental, and we do not foresee rates approaching levels that could dissuade gold buyers.

 

The gold market may face a critical test in the coming sessions. While the market has largely moved sideways for some time now, the bulls need to get some upside momentum going to keep buyers interested. The market remains vulnerable to a larger sell-off if no upside traction is seen, with the $1300 per ounce level potentially providing support.

 

With so many global economic issues still present, and with rates likely to stay low for an extended period of time,  in our opinion any dips in gold may be viewed as long-term buying opportunities. 

The gold market was fairly subdued last week, in a trend that could continue for the next couple weeks until summer’s end. Gold spent last week in a little more than a $20 trading range, as low summer trading volumes may cause markets to drift.

 

The gold market remains in an overall positive technical position, although a good test of the market’s mettle could be in store. Some better than expected economic data in recent weeks, including some key jobs data, is fueling further speculation on another 2016 interest rate hike by The Federal Reserve.

 

These changes in interest rate expectations have put a damper on appetite for gold in recent trade, although the market has not seen a decline of any real significance. While a September hike by the Fed is extremely unlikely, Fed Funds futures are pointing to a much better chance now of a December hike. The odds of a December hike could, however, change again dramatically based on the data flow. Like the previous decision to hike rates last December, the decision by the central bank may once again come down to the wire.

 

The gold bears would suggest that such a move by the Fed is bearish for gold; we believe the market is saying otherwise. Gold is not far from recent highs, and the notion of another hike does not appear to be spooking investors. In a world of increasing negative interest rates and ongoing QE, gold may continue to find support from easy money policies that are not likely to go away anytime soon.

 

This week will be relatively light in terms of data, with the latest readings on Housing Starts, CPI, Leading Indicators and more set for release. Of particular interest to investors could be speeches by Dennis Lockhart and James Bullard. Commentary from these two Fed officials could potentially provide further insight into the Fed’s plans at this point.

 

Gold will also likely be driven by action in key outside markets as it awaits further inputs. If stocks continue to make fresh all-time highs, risk aversion is likely to remain benign. The crude oil market could also have an impact this week. Oil has rallied in recent trade on the idea that some measurements could be implemented to stabilize prices. Higher oil could potentially put more wind into the sails of the equity markets as energy companies stand to gain.

 

On the other hand, if oil is left to its own devices, the market is vulnerable to rolling over once again. The world remains awash in crude oil, and the supply glut could drive prices back down below the $40 per barrel level or beyond. Equities have paid very close attention to crude over the last year, and a fresh slide lower in oil prices has the potential to drive selling in equities as risk aversion picks up. Such a scenario could drive buying in gold, silver and other perceived safe havens.

 

We believe the current dip in gold is likely to be bought, although we question the market’s ability to put together any significant rallies on such light trading volumes. Gold may simply be in a holding pattern until more clarity is seen on the timing of the next rate hike by the Fed and more of the potential implications of Brexit are known.

 

The gold bulls may have to act sooner rather than later, however, as the longer the market stays in this tight range the more susceptible it may become to a larger sell off.