Out of the challenges faced in recent weeks, some positives have emerged. Despite having to contend with numerous, potentially negative headlines, the gold market has shown some significant resiliency and could be set for a bounce-back in the sessions ahead.
Worries over a global slowdown have continued to dissipate, at least for now. Last week, the U.S. reported a very respectable 3.2% GDP figure for the first quarter and other key data points have also pointed to economic strength. Stocks have come roaring back to life, as key benchmarks have carved out fresh all-time highs. Appetite for risk appears to be robust and market volatility continues to decline.
On top of this, the dollar has also recently hit a two-year high. The stronger greenback has likely been a major factor in the lack of upside follow-through in gold and the currency could potentially have further room to run if the data stream remains strong.
The combination of encouraging economic data, higher equities, a stronger dollar and a lack of risk aversion would normally spell trouble for the yellow metal. That did not occur this past week, however, as the metal rebounded from recent lows. Gold has now climbed back into a previous support region from $1280 to $1290 and could potentially target further upside this week.
The last several sessions have shown some core-strength in gold and could potentially be indicative of a bottom having been reached. The next several sessions will be key, however, as the metal must now continue to move higher to negate recent chart damage and technical selling.
For the patient, long-term investor, the recent dip in price could potentially prove to be an excellent buying opportunity. If gold is able to withstand all of the negatives thrown at it this past week, just imagine how it may perform once market dynamics change. At some point, they will, possibly in dramatic fashion.
There is simply no telling just how much stocks and the dollar may have left in the tank. Both could have further room left to run higher before they finally top out. It is difficult to picture a scenario, however, in which both stocks and the dollar continue to rise together. As the dollar strengthens, U.S. equities become more expensive to foreign buyers. Not only could a strong U.S. currency weigh on equities, but other factors such as the Fed and current valuations could also cause investors to begin to shed stocks.
The dollar is likely continuing to enjoy the benefits of tax cuts and government spending along with ongoing issues in Europe and elsewhere. These trends are not likely to continue indefinitely, however, and once the sugar-high wears off the currency could come under pressure. In addition, and increasingly dovish Fed could also potentially weigh on the currency.
The gold market appears to be in its comfort zone for the time being and has shown little interest in probing lower levels. The key 200-day moving average, currently in the $1267 area, has provided some market support thus far and may keep a floor under the market as the bulls attempt another rally.