The gold market may be poised for a retest of recent highs after posting another solid gain of nearly 1.5 percent in Friday’s trade. Gold had a particularly strong showing to end the trading week, as investors geared up for the long Fourth of July Holiday weekend. This week may bring more follow-through buying and gold may find itself at the beginning of a long and extensive leg higher.
More than a week has now passed since the historic Brexit vote was finalized, and markets are still trying to make heads or tails of the potential implications. Calmer heads have prevailed in equity markets in recent days, although it remains to be seen whether or not stocks can once again challenge previous all-time highs. The recent strength in gold and decline in interest rates just goes to show that investors remain very nervous and there is a strong degree of risk aversion present.
Increasing discussions of Scotland and Northern Ireland seeking independence from the U.K. following the Brexit vote will likely only add fuel to the fire, and global equities and risk assets will remain quite vulnerable to further selling.
In the current state of global economic affairs, it is difficult to imagine anything other than very supportive central banks. The U.S. Federal Reserve cited the risks from Brexit in its latest statement in which the central bank elected to keep rates at current levels. The Bank of England and the European Central Bank may both now have to utilize additional stimulus measures in order to try to boost output and stabilize their respective economies.
The notion of more quantitative easing in Europe and further stimulus measures by the People’s Bank of China may keep the Federal Reserve on hold for longer than originally anticipated. The ongoing scenario of low rates and further QE may keep a floor under gold prices for the foreseeable future.
This week, markets will pay close attention to a number of key data points, perhaps the most significant being the U.S. Employment Situation report on Friday. The non-farm payrolls data for May was a bad miss, showing an addition of just 38,000 jobs. Consensus estimates are looking for an addition of 180,000 jobs in June, with the unemployment rate steady at 4.7 to 4.8 percent.
While a lower than expected number may drive further fears about the U.S. economy, it could potentially boost stocks as it may be yet another reason for the Fed to hold rates steady, or even cut them again in the future.
Such a scenario, however, is very demonstrative of just how dependent equity markets have become on “easy money.” This begs the question of just how much further equities may be able to climb given stagnant economic conditions and a lack of profit growth.
Given the current number of unknowns that have the potential to drive global markets, investors may continue to reallocate assets and much of that capital could find its way into gold and other perceived safe havens.
With the rebound seen in stocks this past week after being heavily sold-off, the markets may tip their hand sooner rather than later. It may become a “do or die” time for stocks, which will need to start making fresh highs in order to keep investors interested. If stocks are unable to mount additional upside, the selling could resume and gold could potentially be off to the races.