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.