The Week ahead in Gold
The gold bulls will look to stabilize the market in early action this week after the metal saw some sharp declines late last week. The price of gold declined by around $35 per-ounce between Thursday and Friday and has once again found itself in a band of support in the $1280-$1290 region. The selling seen to end last week has caused some technical damage to the daily chart and the bulls will need to hold the $1280 area or risk seeing a fresh leg lower.
In early action on Monday, lower stocks and a weaker dollar index are giving the market a slight boost.
The ongoing U.S./China trade war has been at the center of market volatility and equity declines. After seemingly getting close to a deal in recent weeks, both sides have pulled back from the table. The U.S. raised tariffs on $200 billion of Chinese goods from 10 percent to 25 percent. China retaliated, also hiking tariffs on some $60 billion of U.S. goods. It has seemingly become clear that China is willing to walk away from a deal, and negotiations could take considerably more time than previously thought. Any further negative news on the trade war could potentially send stocks lower while stoking market volatility and safe haven demand.
Perhaps the notion of a protracted and escalating war on trade was behind the recent bullish fund positioning in gold. According to recent data from the CFTC, large specs raised their bullish positions in gold by about 500 percent. Of note was the large increase in fresh longs for the latest reporting period, even as prices were rising. This would seemingly suggest that traders and investors are still looking to gold as a safe haven, and further equity volatility may fuel more buying in the metal.
The stronger dollar index has likely been a major barrier to higher gold prices, and this week’s Fed meeting minutes could potentially be market moving. The greenback has been in a firm uptrend since the first of the year and has not strayed far from the $98 level in recent weeks. An increasingly dovish Fed could, however, give the bears something to work with. The Fed took a decidedly neutral stance last month, indicating that it did not see reason to move rates one way or the other. Recent developments in the trade war could, however, force the Fed’s hand. If the trade war escalates further, it could have a serious effect on the economy and investor sentiment. Not only that, but it has become clear that the lack of a deal may cause further market volatility and equity declines. The Fed could be forced to cut rates in order to fight the negative effects of a lasting war on trade.
With the current economic and geopolitical backdrop being conducive to higher gold prices, a breakdown in the dollar index could be the catalyst for the next major rally. The gold market has shown it does not want to go down from current levels, so it may simply be a matter of time before the market starts a fresh ascent.