The Week Ahead in Gold
The gold market is slightly higher in early trade Monday as investors digest recent geopolitical developments and await policy decisions from the U.S. Fed and the ECB. Following recent strength, the yellow metal may be due for a pullback and a little consolidation before attempting a fresh leg higher.
Tensions with Iran have continued to intensify. Late last week, Iran’s military seized a British oil tanker near the Strait of Hormuz. The seizure was reportedly in response to the capture of an Iranian oil vessel by British forces earlier in the month. Oil prices are seeing some additional risk premium coming into the marketplace Monday as prices rose by over 2.25 percent in early trade.
As tensions rise between the U.S., Britain and Iran, the possibility of military conflict could increase. A significant U.S. military strike could send Iran a strong message, however, such action could also potentially lead to oil supply disruptions in the region. The Strait of Hormuz is a highly strategic chokepoint, with about 20 percent of the global oil supply traveling through its waters. Any closure or military action in the Strait has the potential to create an oil shock that could have a large impact on the global economy.
In addition to the geopolitical landscape, markets will also be paying close attention to central bank activity. The ECB is set to meet this Thursday for its regularly scheduled policy meeting, while the U.S. Fed will be meeting at the end of the month. Both central banks are expected to ease their respective monetary policies, and investors will be looking for clues as to how much more easing could be seen in the months ahead. Some analysts have suggested that the Fed will ease by 100-basis points over the next year, and with little to no inflation in sight there, there is not much standing in the central bank’s way towards lower rates.
As ongoing U.S./China trade talks appear to be going nowhere, President Trump could keep political pressure on the Fed to slash rates. Trump may be left with little choice but to raise tariffs on Chinese goods further and look to the Fed to support domestic demand while providing ammunition for exporters.
With the 2020 Presidential election quickly approaching, President Trump will remain focused on the economy and asset prices. An increasingly dovish U.S. Fed could pave the way for similar action by China, Japan, Europe and other nations. As the era of easy money continues, currency values are likely to weaken while stocks and risk assets remain artificially elevated.
The combination of geopolitical risks, loose money policies and a global slowdown could be the ideal recipe for higher gold prices. The yellow metal remains on the offensive and will likely challenge the $1450 area again in the weeks ahead. Buyers are likely to step and aggressively buy any dips to $1420 and $1400. An upside breakout above $1450 could set the stage for a rapid rally to $1500 and beyond. In fact, there is not much technical resistance to keep prices in check should a breakout occur, and the market could very well set its sights on previous all-time highs in the months ahead.