The gold market continued its recent losing ways on Friday, as the yellow metal finished decidedly lower to end the trading week. In fact, gold is now on the verge of what could be a significant, fresh leg lower in price that could potentially see the market test sub-$1100 per ounce levels.
A test of $1080 cannot be ruled out, and in fact could potentially set the market up for finding a more sustainable bottom.
The same issues that were bothering gold investors a month ago are still bothering gold investors today. A combination of strong risk appetite, higher equities, rising interest rates and a stronger dollar index are all taking a toll on the gold market.
Stocks carved out fresh all-time highs once again on Friday to finish the trading week with a bang. Although seemingly more and more analysts are now referring to the rally as being “overdone,” “overbought,” or “running out of steam,” there simply is no telling just how high equities might climb. As new highs are reached, there is simply little to no overhead resistance to keep a lid on prices, and stocks are likely to drift higher if nothing else.
The rise in interest rates seen since the Trump election victory has been swift and severe, and already appears to be taking a toll on some areas of the economy like mortgage refinancing.
The Federal Reserve is set to meet this week and it is widely expected that the central bank will raise interest rates for just the second time in a year. It would seem, however, that much of the heavy lifting has already been done with rates in the last few weeks, and the Fed hike has likely been fully priced into the market at this point.
Although seemingly counterintuitive, the Fed actually taking action could potentially help the precious metals find a near-term bottom.
While an interest rate hike of 25 basis points seems to be a foregone conclusion at this point, investors will likely now focus their attention on what the central bank may or may not say regarding the pace of hikes in 2017.
Donald Trump is considered by some to be more hawkish, and some have suggested he may try to influence the Fed. The Fed will likely try to steer clear of any discussion about the potential effects of Mr. Trump’s policies, and may not offer a ton in the way of guidance for next year. As of right now, the market is pricing in two rate hikes for 2017, which would likely come in June and December.
The central bank maintaining its stance of slow and incremental rate hikes could potentially be bullish for gold and precious metals, and overblown fears of accelerated rate hikes could potentially fade based on the central bank’s commentary.
It is worth noting that a historic event took place last week that could be a potential game-changer for gold. A new gold standard was agreed upon by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the World Gold Council. Changes made to Sharia law could now potentially open the door to gold investing for 1.6 billion Muslims all over the world.
This new source of demand could potentially have a significant impact on this important asset class, as Muslims make up nearly 25 percent of the world’s population.