This week could be a pivotal one for the gold market as the bulls will look to build on solid strength seen over the last few trading days. Gold closed the week at $1275.90 per ounce and is within striking distance of the early May highs above $1300 per ounce. Changes in interest rate expectations have been a significant factor in gold’s recent rise, and will likely continue to have a strong influence on precious metals markets.
Following the release of the latest nonfarm payrolls data which showed the U.S. added just 8,000 jobs in May, it is difficult to imagine the Fed taking action at their meeting on monetary policy this week. In fact, a June rate hike appears to be completely off the table and odds of a July hike are slim.
While Fed Chairwoman Janet Yellen has remained upbeat on the labor market, concerns over its health could now potentially keep the central bank on hold until September or even beyond.
Investors will be hoping to get more clarity from the Fed this week at the conclusion of the FOMC meeting. The central bank will likely stick with the same type of approach it has in the past, and will reiterate the idea that any further hikes in interest rates will be data dependent.
While the uncertainty surrounding rates is certainly a big issue for investors, there are other issues at work currently that could also keep a floor under gold prices. Expanding global negative interest rates could keep driving investors to hard assets like gold. According to bond king Bill Gross, bond yields are at their lowest level in 500 years. In a recent comment, Mr. Gross referred to $10 trillion of negative yielding sovereign bonds as “a supernova that will explode one day.”
Clearly, the current accommodative environment along with expansion of negative yields is bullish for gold, and more investors may seek its refuge.
Currency markets could see some significant volatility this week as the “Brexit” referendum approaches and the Fed releases its decision on rates. The dollar index saw a steep decline in the aftermath of the weak May jobs report, and could potentially be gearing up for a retest of the May lows.
A breakdown in the dollar below those lows could possibly see a fresh and significant leg lower in the greenback. Recent weakness in the dollar has likely been a large factor in gold’s rally and further downside in the currency could be the fuel that lights the fire of a much larger scale rally in gold.
Stocks may be closely scrutinized this week as well, as the broad market S&P 500 has backed away from previous all-time highs. While stocks remain at lofty levels, they have yet to mount a significant attempt at an upside breakout. A breakdown, on the other hand, could potentially send investors running for the exit signs and could drive further buying in perceived safe havens such as gold and silver.
Markets may see some quiet ahead of the Fed this week, with the potential for volatility as the FOMC meeting conclusion approaches and in its immediate aftermath. In spite of some possible short term volatility, gold appears to be positioned for further upside and seems to have many key global issues working in its favor.