The gold market had a less than stellar showing last week, with prices remaining on the defensive and testing recent swing lows. This trend could potentially continue this week, as shifting rate expectations and a stronger dollar take a toll.
The gold bulls will need to take a stand-and soon-to stem the bleeding before it gets worse. The gold market may potentially see some volatility this week as investors look to square up positions ahead of the highly anticipated FOMC meeting announcement. .
On Wednesday, the FOMC will announce its decision on interest rates. While Fed Funds futures contracts are only pricing in a small chance of a rate hike this week, the possibility of action by the central bank does exist.
Assuming the Fed does not act, however, investor attention will turn to the central bank’s assessment of the economy and commentary on conditions. Investors will be looking for any further clues as to the timing and pace of any further rate hikes, and the possibility of a December rate hike will likely become a focal point.
The case for a rate hike has seen some ups and downs in recent weeks. Judging by recent comments made by several Fed officials, however, it seems the central bank is intent on raising rates before the end of the year.
Recent weakness in manufacturing and even a disappointing jobs report for August may potentially be offset by decent activity in housing and an uptick in inflationary pressures. The Fed may, however, want to see the September jobs data before actually pulling the trigger on a rate hike.
In addition to the FOMC meeting, investors will digest the latest readings on Housing Starts, the Housing Market Index, MBA Mortgage Applications, Weekly Jobless Claims, Existing Home Sales, Leading Indicators, PMI Manufacturing Index Flash and more.
If the Fed signals it will maintain its current data-dependent approach, the data stream over the next several weeks will be very closely scrutinized. Markets could see increasing volatility as investors try to position for a possible rate hike. On the other hand, if the data seen in the coming weeks fails to meet expectations, it could bolster the dovish case and stocks could see renewed buying interest if expectations for a rate hike this year see a significant decline.
Although gold could see further selling if the Fed does take action, the potential downside may be fairly limited. It is difficult to imagine a scenario in which rates rise fast and furiously, in fact, rates may see very limited upside for some time. On a global scale, the environment of low to zero interest rates appears to be far from over. Although the ECB and Bank of Japan disappointed markets recently with a lack of more significant stimulus measures, it may not be long before these central banks are forced to roll out more easing plans.
The notion of low global rates and ongoing easing may keep gold well-supported. Although the dollar may see further upside and possibly weigh on gold, such upside may be limited as any additional changes in rates are likely to be very slow and incremental.
In addition, stocks have shown some signs of cracking recently and a hike by the Fed may cause more selling to take place. As investor capital starts to flow out of stocks and risk assets, investors will be looking for alternative asset classes to put that capital to work in. We are of the opinion that a significant amount of that capital could find its way into gold and other perceived safe haven assets.