The gold market appears to be treading water in early action Monday as markets get ready for a variety of key data points and news. At the center of attention will be the FOMC meeting taking place Tuesday and Wednesday as well as the non-farm payrolls report due out Friday. In addition, high level talks will be taking place this week in Shanghai as the U.S./China trade war continues.
The Fed is widely expected to cut its key interest rate by 25-basis points at the conclusion of its two-day meeting Wednesday. Although the Fed could potentially take a more significant approach and cut rates by 50-basis points, recent data has suggested such a move may not be warranted at this time. Markets have already priced in a quarter-point cut and will be far more interested in any clues the Fed provides about policy going forward. Some analysts have suggested that a rate cut this week is simply an “insurance” cut and is intended to get ahead of the ongoing global slowdown. Others have suggested that it may be the first in a series of cuts that could potentially see rates back at zero in the quarters ahead.
The Fed’s language has the potential to move markets. If the central bank views this as an insurance cut and does not allude to further cuts, it could disappoint stock investors and send equity markets lower. The dollar could potentially get a boost as well, weighing on hard assets. If the Fed’s commentary reflects an increasingly dovish Fed, stocks and gold could rally together while the dollar weakens.
The non-farm payrolls data at the end of the week could help temper expectations for further action from the Fed. After a solid addition of 224,000 jobs in June, July estimates put job creation at a respectable 165,000. If the report meets or exceeds expectations, it could potentially give the Fed further reason for pause.
In addition to the Fed and economic data, markets will be paying close attention to any progress in trade talks this week. Treasury Secretary Steve Mnuchin and Trade Representative Lighthizer are in Shanghai this week for talks that begin today. Although there has been little progress to report in recent weeks, both sides appear to be increasingly eager to hammer out a deal. A successful meeting this week could lay the groundwork for further dialog between President Trump and Chinese Leader Xi Jinping.
The gold market may find itself in a holding pattern until the Fed announcement Wednesday. A quarter-point cut may not have a huge impact on markets but may give the gold bulls the green light to attempt a fresh leg higher. The market may find willing buyers on dips to $1420 and $1400 per-ounce, while recent highs in the $1450 region may act as near-term resistance. An upside breakout of recent highs could potentially set the stage for a sharp and significant rally higher that could see prices hit $1500 in short order. With little upside technical resistance, strong market fundamentals could propel prices to previous all-time highs or beyond in a matter of months.