The Week Ahead in Gold
The gold market is gaining further ground as the new trading week gets going. Fears of the coronavirus from China are on the rise, as new cases have been identified and as travel restrictions have been implemented. This week is also the Chinese Lunar New Year Holiday, the biggest Chinese holiday of the year. Authorities have reportedly extended the holiday break by two days in the hopes that people will stay home longer.
Stocks are taking it on the chin today. At the session lows, the Dow Jones Industrial Average was down over 400 points for a decline of about 1.5 percent. The spread of the coronavirus may not actually be the prime catalyst, however. Stocks have become arguably overstretched in recent months and investors have been awaiting the next major “panic.” This could be that “panic” that may push equity prices back down to earth and even provide a buying opportunity. Of course, a worsening of the health situation or a declaration of emergency by the World Health Organization could potentially set the stage for much larger stock market declines which could take place rapidly and systematically. That is thus far not the case, however, and stocks could drift lower until the situation improves.
The gold market is benefitting today as risk aversion rises sharply, and some analysts are even suggesting today that $1900 per ounce is the next logical target for the yellow metal. A rapid move towards previous all-time highs could trigger further buying interest in the metal, and a significant move beyond previous highs could be seen in short order. With no upside chart resistance, the gold market could move dramatically higher to $2500 or even $3000 before taking a break.
In addition to the coronavirus outbreak, the markets will also have to digest a large amount of earnings this week. The next several trading days could be a make or break point for the market, and any disappointments combined with current economic and geopolitical fears could fuel a sharp sell-off in equities and risk assets. Such a sell-off could spur additional buying in gold and could cause the metal to break out above the $1600 region.
In other news, recent data from the Commodity Futures Trading Commission (CFTC) showed that net bullish positioning in gold recently declined. The bulls reportedly trimmed their bullish positions in the market by three percent, and the decline was comprised of both long liquidation as well as fresh short positioning. Although difficult to point to one reason for the drop, some suggested that a calming of the Iranian situation could be behind the small decline. Other investors may be looking to close out options positions before expiration on Tuesday.
The gold market appears to be on solid footing but may face a key test ahead. The bulls need to extend the rally beyond recent highs and to do so on a continuous, closing basis. If the market can maintain higher trade, an increasing number of investors may look to get involved and the market could find itself on a self-sustaining run higher.