The gold market is on weaker footing in early action Tuesday as traders return from the long Memorial Day Holiday. Stronger stocks and a higher dollar are likely the primary culprits behind the selling today, and the market may see increased technical selling pressure if prices dip below the $1270 level.
The gold market has not seen a fresh leg lower in recent weeks, as any dips have thus far been aggressively bought. Patience on the part of buyers may be rewarded in the weeks and months ahead, however, as numerous issues come into focus that could drive demand for gold and other safe havens while putting a major dent into risk appetite.
The state of the U.S. economy will be a major influence on the markets and could potentially fuel a major reversal in equities. Although the economy remains strong overall, there have been some serious cracks showing up that could be cause for concern. Key indicators such as retail sales and factory output both declined in April. Durable goods orders also declined, further suggesting the economy is losing momentum. Several forecasters have already revised their Q2 GDP estimates lower, and any further disappointments in the data stream could force the Federal Reserve to spring into action.
Also adding to investor angst is the ongoing U.S./China trade war. After reportedly nearing a deal last month, talks fell apart rapidly. There are currently no scheduled meetings for President Trump and Chinese leader Xi Jinping to try to reach an agreement, although there is some optimism that the two leaders will have a chance to talk at next month’s G20 summit in Japan. Some reports have suggested, however, that the two sides are too far apart for a meeting to be productive at this point. China seems ready and willing to take a wait-and-see approach to negotiations, and the war over trade could escalate further with a lack of progress.
Other issues that could potentially fuel demand for gold include the ongoing uncertainty over Brexit, European elections, North Korea and Iran.
With the recent resignation of Prime Minister Theresa May, the ongoing Brexit saga has gotten even messier. Although the gold market has not shown much interest in Brexit thus far, that could change in a hurry if a no-deal Brexit looks likely. Recent elections may suggest that the next Prime Minister could be willing to leave without a deal, and tensions could rise further as the October 31st extension date gets closer.
The dollar may also play a key role in the weeks and months ahead. The greenback has been stubbornly hovering near its recent highs around the $98 level and has thus far not shown much weakness. That could change in a hurry, however, as the Federal Reserve could be forced to start cutting rates. In addition to an increasingly dovish Fed, the currency could also come under pressure as the effects of tax cuts and government spending fade further.
Looking at the bigger picture, there are numerous issues at work that could benefit gold. Given the likelihood of another recession, a no-deal Brexit and a further escalation of the war on trade, it may simply be a matter of time before gold sees a sharp and significant upside breakout.