The Week Ahead in Gold
The start to the trading week has seen volatility come roaring back into equities. The CBOE’s fear gauge, the VIX, is up nearly 30 percent in early action as the Dow Jones Industrial Average has dropped nearly 300 points. U.S. President Donald Trump caught investors off-guard over the weekend with a pair of tweets that not only expressed frustration with ongoing U.S./China trade negotiations but also suggested that the U.S. would raise tariffs on $200 billion of Chinese goods from 10 percent to 25 percent.
Trade negotiations were set to continue this week in Washington, but it is now unclear if scheduled meetings will take place. Some reports have suggested that the meetings may be delayed a few days while others have stated that talks could be cancelled all together. Markets will be paying close attention to any further developments on trade this week. If talks do continue, things are likely to calm down again. If talks are cancelled, market volatility could see further expansion and stocks could become vulnerable to additional selling pressure.
The ongoing trade conflict has not had the type of effect on gold that many had anticipated. Despite today’s volatility and sell-off in stocks, gold is not seeing much interest. Investors are directing their attention to other perceived safe havens such as the Japanese Yen. Although many gold bulls are likely perplexed by the lack of buying interest in the metal given the rising volatility and uncertainty, it also makes a great deal of sense. If the U.S./China trade war escalates further, it could have a significant impact on the globe’s first and second-largest economies. China is a massive buyer of commodities and further trade tensions could potentially put a significant dent in the country’s appetite for commodities and materials. For now, it seems that gold is being treated as just another raw commodity rather than a safe haven.
The dollar index is also likely to impact the market if trade negotiations fail. The greenback is seeing a slight bid today as risk aversion is on the rise and could see further strength if trade talks are cancelled. Although gold has shown it can rise along with the dollar, a stronger U.S. currency may simply be one more hurdle the bulls must contend with.
The latest Federal Reserve meeting also did not do the market any favors. The central bank essentially suggested that rates are likely to stay at current levels for some time, and chances of a rate cut appear to be much lower than markets had anticipated. Recent strong employment data would also seem to suggest that economic weakness seen in recent months may be transitory and that the Fed could potentially take a more-hawkish tone again in the coming months.
Gold has thus far maintained support in the $1280-$1290 region backed up by its 200-day moving average. An ongoing lack of upside follow-through, however, could open the floodgates to a fresh, significant leg lower in the weeks ahead.