The gold market has remained on the defensive in recent trade, as a combination of factors and a lack of any fresh, bullish catalysts weighs on prices. Higher stock markets, potential tax reforms and overall robust risk appetite have all played a part in gold’s recent lack of upside, and may continue to do so for the time being in the absence of any fresh news.
Investors are looking ahead to the highly anticipated Federal Reserve meeting this week, at which the central bank is widely expected to hike interest rates by another 25 basis points. This would bring the key rate to 1.25-1.50% as the Fed continues to look ahead at normalizing monetary policy. Although a rate hike appears to be completely “baked into the cake,” investors will likely be far more concerned with the Fed’s commentary following the announcement on policy.
The central bank will likely offer some discussion on not only the potential path of rates going forward, but its assessment of economic conditions as well. Some of the key issues that the central bank may address include the inflation picture and tax stimulus. There has already been some discussion about the Fed becoming more aggressive regarding monetary policy if tax stimulus is in fact passed, and markets will be very interested in any type of guidance it chooses to provide. The ongoing lack of inflation may also be a focal point, although prices have recently shown some signs of picking up.
The gold market has a tendency to come under pressure heading into a rate increase, but then often rebounds significantly once the decision has been made official. This time around may be no different.
Stocks have thus far not demonstrated any significant signs of a collapse or reversal, and appear poised for further upside. The ongoing ascent by equities is likely having a substantial effect on gold, and the yellow metal may not be able to mount any sustainable rallies until stocks appear to have topped.
Also potentially having a negative impact on gold right now is the hype surrounding Bitcoin. Various exchanges have now launched futures contracts on the cryptocurrency, and prices could potentially go higher-much higher-before possibly crashing back down to earth. The current state of euphoria regarding that market has is yet another clue about a possible bubble, and that bubble may end badly for a lot of uninformed investors.
On the plus side for the metal, the geopolitical landscape remains complicated, to say the least. The recent decision by the Trump administration to move the U.S. embassy to Jerusalem has enraged many in the Middle East, and protests are ongoing.
And of course, North Korea remains a very critical issue that must be dealt with.
Against this backdrop, gold is not likely to fall too far in price. In fact, recent declines in the metal could potentially represent an excellent long-term buying opportunity for the patient investor. The run higher in stocks will eventually fizzle, and Bitcoin may prove to be nothing more than the next big bubble. Once some of these market dynamics begin to change, the yellow metal will have its chance to shine once again, and that may come sooner rather than later.