Gold ended the week on a high note, showing further signs of underlying strength. From a technical standpoint, the gold bulls appear ready to challenge the recent highs, and a test of the $1400 level may be in store. The fact that gold continues to climb along with stocks is certainly noteworthy, and at some point this positive correlation is likely to diverge.
Gold may see follow through buying this week as uncertainty over the pace and timing of any additional rate hikes by the Fed becomes an area of investor focus. While the FOMC appeared to be significantly more upbeat about the economy, other data painted a different picture. This will only fuel further speculation on whether or not the Fed looks to tighten again anytime soon.
On Friday, Q2 GDP data released missed expectations by a large margin, registering a reading of only 1.2 percent. Consensus estimates were looking for a reading of 2.6 percent. In fact, in recent weeks, hopes were for a number approaching the three percent mark. Those hopes faded rapidly, however, as some key pieces of economic data such as Durable Goods Orders failed to meet expectations recently.
Despite the lousy headline number, there were some positives in the report. Consumer spending rose by 4.2 percent, while net exports rose by 1.4 percent.
This data will certainly give the Fed more to consider when it meets again. While Fed Fund futures are pricing in a moderate chance of a September interest rate hike, the Fed could potentially elect to hold off until December or even next year.
In addition, while post-Brexit volatility and selling in stocks has abated-for now anyway-it remains unclear as to just how the historic vote might affect financial markets. This issue could still present a significant headwind for global markets and will likely be monitored closely by policy makers.
The dollar was beaten up badly on Friday following the GDP data, declining 1.27 percent during the session. The greenback has essentially fallen back near its previous trading range, and additional weakness could be seen if economic data disappoints and the Fed is given more reasons to keep rates steady at current levels.
The highly anticipated Bank of Japan meeting was a disappointment for investors, as the BOJ did not cut rates further into negative territory or institute more significant measures. While some adjustments were made, policy makers did leave the door open for further easing in the future. Japanese stocks sold off on the news but later recovered. This may simply be another sign of just how dependent equity markets have become on quantitative easing.
Gold has held up very well considering recent strength seen in equities. Despite that strength, however, interest rates remain not far from all-time lows. At some point, this divergence is likely to come to a head, and stocks could potentially see a significant sell-off from current levels. This could potentially drive additional capital into gold and other perceived safe haven assets. For now, however, it appears that the path of least resistance in stocks remains higher, as yield hungry investors have few, if any, alternatives.
While we expect gold to remain on the offensive despite higher stocks, any signs of significant weakness in equities could potentially fuel a much sharper rally in gold as more investors look to jump on the bandwagon.