The Week Ahead in Gold
The gold market is slightly lower in early Monday trade; however, the market remains firmly above the psychologically important $1400 level. Global stocks appeared headed for a flat open as investors get ready for the Q2 earnings season and await some key pieces of economic data. Overnight, data from China showed the weakest GDP growth in 27 years. Markets are not showing much reaction, however, as June retail sales, industrial output and fixed asset investment all surprised to the upside.
AS the U.S. Fed guides the nation towards easier monetary policy, investors may turn their attention to corporate earnings while also watching for any fresh developments in the U.S./China trade war. Markets may be particularly interested in the corporate outlook for the second half of the year, and companies could provide further clues about the effects of the trade war. The war on trade is likely to remain a key theme in the marketplace as neither side appears willing to budge at this point. Corporations could be forced to lower guidance based on current tariffs and could even alter their plans based on the threat of additional tariffs.
The Fed is expected to cut its key interest rate by 25-basis points at the end of this month and could potentially cut it by 50-basis points in order to create more of a shock-and-awe effect. It is clear the central bank will be forced to lower rates, but the bigger question at this point is by how much and how fast. With little to no inflation to speak of, the central bank could become fairly aggressive as it lowers rates again, and some analysts have even suggested the Fed could take rates down to zero.
The combination of a global slowdown and trade war will force the Fed’s hands, and in turn should keep gold on the offensive. The dollar index, which has spent much of the last couple years moving higher, appears to have found a top. As the effects of tax cuts and government spending wear off, an increasingly dovish Fed could send the dollar index sharply lower. A breach of the $96 level on the downside could potentially set the stage for a steep decline, and hard assets like gold could stand to benefit.
As the dollar tries to avoid a major technical breakdown, gold appears on the verge of a major upside breakthrough. The market has thus far maintained trade above the $1400 level, and recent dips have been bought. With the market trading at multi-year highs, the yellow metal may simply need to take out the highs reached in June in order to really blast off. An upside breakout of this level, which saw spot prices approach $1420 per-ounce, could set the stage for a rapid run to the $1600 area. From there, a retest of previous all-time highs could be seen.
The threat of a global recession, numerous geopolitical risks, a dovish Fed and the potential for lower stocks and a lower dollar may all keep the gold market well-supported in the months ahead. In fact, the current economic and geopolitical climate could be the perfect recipe for higher gold prices, and the long-anticipated bull market in gold now appears to be gathering steam.