After a brief period of consolidation, the gold market could potentially be headed higher in the weeks ahead. This week; markets will remain focused on U.S. macro data as well as the potential for another U.S. Government shutdown.
There are numerous wildcards that could drive price action in the week ahead. The deadline for a deal on Trump’s proposed wall along the country’s southern border is February 15th. If a deal to fund the wall is not reached, Trump appears ready and more than willing to shut down the government again. This scenario could potentially send gold prices higher as it did in late December when the government was closed for business.
Any shutdown-based rally may prove transitory in nature, however, as shutdowns have historically not had much of a long-term impact on gold prices.
Markets will also keep an eye on any commentary from the Fed. `Although there is no FOMC meeting this week, there are several Fed officials speaking at various engagements. After making a large swing from the hawkish to the dovish side of the ledger in recent weeks, the Fed is now faced with an interesting dilemma: How to balance a strong labor market and resilient U.S. economy against the backdrop of weakening global growth. The Fed is also likely to take the stock sell-off that marked a weak end to 2018 into account and may look to rock the boat as little as possible. Dovish expectations have possibly been overblown at this point, however, and at least one rate hike from the central bank this year cannot be ruled out.
The ongoing U.S./China trade negotiations appear to have hit a snag, and the deadline for a deal by March 1st is quickly approaching. A U.S. delegation will be in Beijing to continue previous talks, but as of right now it does not appear that President Trump and Chinese Leader Xi Jinping will be meeting any time soon. If significant progress is not seen in the weeks ahead, the agreed upon deadline will likely come and go without so much as the initial framework for a deal in place. The trade war has made a clear dent in the economies of both countries, and the longer it continues the deeper the global slowdown may become.
The pieces for a long-term sustainable rally in gold appear to be in place. The market seems to now find itself in a win/win situation regardless of what the Fed does or doesn’t do and stands to see further upside as global economic and geopolitical risks rise. The market’s intermediate-term uptrend remains intact, and buyers have thus far been willing to step in and scoop up the yellow metal on any dips. The market has also benefited from some recent weakness in the U.S. dollar, but will likely need a further breakdown in the greenback to really start making significant upside headway.
An increasingly dovish-Fed and the potential for rate cuts this year or next could set the stage for a major dollar decline. Such a decline would also likely coincide with a rising risk of recession, increasing risk aversion and lower equity markets. Put together, these factors form what could be the ideal recipe for significantly higher gold prices in the months and years ahead.