The gold market is seeing some mild pressure to kick off the new trading week as investors take profits and as appetite for risk sees a bit of a surge. Over the weekend, The People’s Bank of China took action that could boost its economy. That measure, combined with a renewed optimism over U.S./China trade talks, has stock investors eager to buy at Monday’s open.
The People’s Bank of China unveiled a key interest rate reform designed to lower interest rate costs. The PBOC said that it would improve the mechanism used to establish the loan prime rate this month which should lower corporate borrowing costs. The move came following weaker than expected economic data for July that showed the Chinese economy stumbling more than expected. The data clearly demonstrates the negative effects of the ongoing war over trade which drove growth to almost a 30-year low.
Talks over trade could potentially be turning a corner. U.S. Economic Advisor Larry Kudlow suggested that recent telephone conversations between U.S. and Chinese negotiators had been positive. Further talks are planned over the next 7 to 10 days and if successful could lead to higher level discussions in short order.
In addition to ongoing trade talks, markets will also continue to pay close attention to the yield curve. Inversion of the U.S. curve caused quite a stir in markets last week, and there was no shortage of headlines on the subject as major stock indexes declined by nearly 3 percent in a single day. Some analysts have suggested that risks of a recession are overblown, and that the inversion of the curve is due to alternative factors. Whatever the case may be, the curve could invert again and send markets into a frenzy. If consumers perceive a higher risk of recession, that can lead to a cutback in spending and increase the economy’s vulnerability to a policy mistake and overall global economic weakness.
The highly anticipated Fed symposium from Jackson Hole, Wyoming is also taking place this week. Fed Chairman Jerome Powell will have no shortage of issues worth discussing including effects of the ongoing trade war, negative yields and the rising risks of a U.S. and global recession. It is expected that Powell will do nothing to suggest that the Fed won’t cut rates again next month by 25-basis points. The bigger question may be if the Fed Chief decides to open the door to a 50-basis point cut or if the central bank signals that recent action is the beginning of a full easing cycle.
The numerous key issues including trade, interest rates, the global slowdown, Hong Kong unrest and even Brexit could keep the gold market well-supported in the weeks and months ahead. The yellow metal has been on the defensive in recent action since hitting a high near $1550 last week, although some back-and-fill trade should be considered constructive and is likely nothing more than a healthy pullback. The market remains in a strong uptrend and appears to be building a higher base of support around the $1500 region that could act as a springboard for the next major surge higher.