The Week Ahead in Gold
The New Year has been a busy one thus far, a trend that could be set to continue for some time. Although the gold market kicked off the new trading week on a poor note, the patient long-term investor could be handsomely rewarded. The yellow metal dropped sharply on Monday, trading lower by $14 per ounce as investor risk appetite appeared to strengthen at the beginning of the week.
The U.S./Iran situation has calmed, for now anyway. There has not been any more violence since last week’s Iranian missile attack on bases housing U.S. troops in Iraq. In other news, the Iranian military did admit to accidentally shooting down a Ukrainian Airlines Boeing 737 jet that had just taken off from Tehran International Airport. A spokesperson for the Revolutionary Guard stated that an operator had mistaken the plane for a missile and had made the incorrect decision to fire on it. Iran has said that it is unwilling to turn over the plane’s black boxes to Boeing, making an investigation of the crash even more challenging. If the boxes are heavily damaged, there are only a handful of countries in the world that may assist in analysis, including the United States, Great Britain and France.
The markets are looking forward to the signing of the “phase 1” trade deal, set to take place this week. The ongoing U.S./Chinese trade war has had a measurable effect on the global economy, and if allowed to continue, could potentially force the global economy into recession. Few, if any, details of the agreement have been made public thus far. On Monday, however, the U.S. removed China from its list of currency manipulators in a move viewed as being diplomatic in nature. The “phase 1” agreement may have little substance at all and may be more of a vehicle for defusing tensions rather than anything else.
Despite the potential for a long-term trade agreement being reached by the U.S. and China, a lot of fear remains in the marketplace. Fear of a global recession, increasing violence with Iran, Brexit and a Fed that is looking to stand pat on rates may all keep buying interest in gold elevated for the next several months or longer. The yellow metal appears to want to go higher and has maintained trade above the $1500 level for several sessions now.
Both the fundamental and technical outlooks for gold are positive currently. The market has remained in a two-month long uptrend on the daily chart and has thus far not shown any significant breakdowns. The next major target for the bulls may be recent highs in the $1590 region. A breakout above this level could not only attract additional buying interest in the market but may also force more shorts out, leading to a “short squeeze” and higher price pressure.
Although buying in gold has remained solid, that could potentially change if economic and geopolitical tensions change. A viable, long-term agreement on trade, for example, could push 2020 back into economic growth. This could, in turn, cause central banks to halt current easing or even begin tightening. A lack of further easing or tightening of monetary policies could have a bearish effect on the gold market. Although such issues could be months down the road, it could potentially happen and is worth consideration for long-term investors.