The gold market ended last week near key support at the $1200 level, and thus far the gold bulls have not been able to really stop the bleeding. The market may potentially find some chart support just below $1200 in the $1196-$1198 area, although a decisive breach below this level could potentially see a fresh leg lower in price.
Looking at gold as a long-term investment (the view we believe should be taken), the market may potentially provide some significant buying opportunities at current levels or if prices decline further.
It is important to keep in mind that markets have been moving since the U.S. Presidential election based on the notion of significant changes in economic and possibly even monetary policies. None of these changes has, however, been put into practice yet, and some of them may be very challenging to implement.
Although the idea of increased government spending and lower taxes sounds great on the surface, some analysts have suggested that putting such a plan into action may be extremely difficult. Of course, precisely how Mr. Trump plans on accomplishing such objectives also remains quite unclear, as little if any specifics have been divulged at this point.
Some might consider recent market action euphoric, and some analysts have already been discussing the possibility of the stock rally and treasury sell off being overblown.
Time will tell…
The rally in the U.S. Dollar Index is a whole nother story. The greenback has been on a tear higher, moving up as investors consider the potential ramifications of a Trump Presidency including protectionism, significant changes in trade, higher interest rates and more.
The dollar recently broke out above the upper end of its recent multi-year trading range, and is currently trading at levels not seen since the early 2000s.
It seems for all practical purposes that the dollar will continue to move towards parity with the euro, while also gaining against some other key currencies. The question is: Is the recent run higher in the dollar sustainable? The dollar may continue to move higher until more clarity is seen on Trump’s economic plans, and if some of these key plans currently being discussed are not able to be implemented, the dollar could potentially see a major reversal.
For the time being, however, it is difficult to imagine a major rally in gold or precious metals if the dollar continues its recent ascent.
Interest rates are another key theme that investors will be paying close attention to. Trump is considered by some to be far more hawkish, and investors seem to be speculating on a faster pace of rate increases. Fed Funds futures currently point to about a 90 percent chance the central bank will tighten in December, although this hike appears to have been fully discounted by markets at this point.
In fact, with the recent bond sell off, rates have risen sharply in the last several sessions, and it would seem that a lot of the heavy lifting has already been done for the Fed.
Some analysts still expect the overall pace of additional rate hikes to remain slow and incremental, as the Fed will likely want to avoid smothering the economic embers currently burning.
For now, gold and silver may potentially remain on the defensive. That being said, however, markets have a funny way of sucking as many investors into one side of a trade as possible before turning sharply the other way. The more bearish sentiment becomes surrounding gold and silver, the better the likelihood that these metals have found a significant bottom.