The gold bulls did not show much enthusiasm Monday as spot gold prices declined by nearly $10 per ounce. Spot gold now sits around the $1982 level as the bulls have faded further following recent selling in the metal. Some better-than-expected U.S. economic data also played a role Monday as ISM manufacturing data showed a stronger-than-expected figure for April. Construction Spending also beat market expectations Monday morning, and the two data pieces together proved to be more than the gold market could bear.
Some safe-haven demand was seen in gold earlier in the session Monday. Over the weekend, the FDIC was forced to step in and shutter First Republic Bank, making it the second-largest bank failure in U.S. history. J.P. Morgan stepped in to buy the bank’s assets and its CEO, Jamie Dimon, provided some reassurance to markets earlier in the day. Dimon stated that the U.S. banking system is very healthy and likely put to rest some rising concerns over the safety of the banking system. Those concerns may rise again, however, if another bank fails or appears to be on the verge of failure. With several large failures having taken place in recent months now, the threat to the system is far from over.
Investors will turn their attention to the FOMC meeting this week. The meeting begins on Tuesday and concludes on Wednesday. It is widely expected that the Fed will hike interest rates again by 25 basis points. The European Central Bank (ECB) also meets this week on Thursday and is also expected to hike rates by a quarter point. Today’s stronger data may only reinforce the policy hawks and could give the Fed reason to raise rates further without too much thought. The question after another rate hike this week is what the Fed may see in store for the months ahead.
With many investors expecting the Fed to hike this week and then enter a holding pattern, the data stream may become even more closely scrutinized. Any significant beats or misses in the data could give markets reason to think the Fed will hike rates even higher or could begin to start easing rates. With the risk of recession lingering around, the Fed may be more likely to begin lowering rates than trying to push the envelope even higher. Any signals that rates could be taken lower may fuel buying in stocks and gold. Any signals that rates could go even higher may have the opposite effect, however, and could send gold and equity markets sharply lower.
For the time being, the gold bulls remain in control on the daily chart. The bulls will need to stabilize the market and prevent further erosion lower, however, to maintain that control. The bulls need to eye the April highs around $2063 and take them out on a closing basis if the rally is to continue.