The gold market will continue to monitor Washington this week, as the divergence between House and Senate tax bills seems to be widening. Major tax reforms were an area of focus for the Trump campaign, and a year after Trump was elected President he is trying to make good on that campaign promise.
The fight for tax reform is not going to be easy, as disagreements remain on some major issues. In addition, implementation of key parts of any such legislation may need to be phased in rather than being put into place with immediate effect. If the various parties involved are not able to move closer to a deal, or if it appears that any deal may take more time than originally anticipated, it could potentially weigh heavily on the dollar while providing gold a boost. Stock markets could feel some heat from further delays as well, and any signs of stocks topping out could also be bullish for gold and other perceived safe haven assets.
Now that President Trump has appointed Jerome Powell to be the next Fed Chair, markets will be looking for any clues on the central bank’s plans regarding monetary policy. Although Powell is widely considered to be someone who will not rock the boat, it remains unclear if he may bring any significant changes in opinion to the central bank. Investors may pay close attention to this week’s inflation data, as the latest readings on both the Producer Price Index and Consumer Price Index are set for release.
Consensus estimates are looking for a rise of .1% in month-over-month consumer prices, with the core reading rising .2% on the month. Year-over-year core CPI is expected to remain at 1.7%. Assuming the inflation data is in line with estimates, expectations for monetary policy are likely to remain unchanged. Any upside surprises, however, could potentially fuel speculation about a more aggressive Fed and a rethinking of current rate expectations.
For now, the gold market may remain range-bound in the absence of any fresh, bullish catalyst. The market has been moving sideways for some time, with both the bulls and the bears failing to make any significant headway. The longer the market remains range-bound, however, the more substantial any breakout could be.
Although numerous issues may potentially favor an upside breakout, the gold bulls may have more work to do before a sustainable upside move can take place. Ongoing all-time highs in stocks and robust appetite for risk continue to be major hurdles for higher gold, and it may very well take a significant stock market crash or decisive reversal in equities to fuel a substantial rally in the yellow metal. Given the age of the bull market and the likelihood of the next recession coming down the pike, meaningful downward pressure in stocks could come sooner rather than later.
In the meantime, the gold bulls may simply remain content buying any significant dips in price as they patiently await the next cyclical bull market getting started.