The Week Ahead in Gold
The gold market is under moderate selling pressure as stock markets move higher and risk appetite is on the rise. Fed Chairman Jerome Powell told a House of Representatives Financial Services Committee today that the U.S. economy is in a good place, even as he discussed the coronavirus and the long-term health of the economic outlook.
The current U.S. economic expansion is the longest on record and is now in its 11th year. Powell repeated the central bank’s view that current interest rates, between 1.50 and 1.75%, are appropriate to maintain growth. The outbreak of the coronavirus, however, will impact economic activity in China as well as that of its trading partners. The U.S. will almost certainly feel the effects of the virus as well and it is difficult to tell how much the spread of the virus may affect GDP. Powell suggested that the Fed will have to consider whether the effects will be persistent enough to warrant a material reassessment of the economic outlook. He reportedly stated that it is simply too early to know at this point.
Powell also discussed labor market conditions and suggested that the labor market has remained strong. He also suggested that companies are increasingly willing to hire workers with less skills and to train them, which could be indicative of labor market gains spreading to more groups. Powell did, however, also cite some concerns over the labor market. He discussed disparities being seen across racial and ethnic groups and suggested that individuals in their prime working years are not being seen in the same force as in other countries.
Of note is the fact that Powell reportedly warned about the increasing and massive fiscal deficit. He reportedly suggested that putting the nation on a path towards a balanced budget when the economy is strong would allow for flexibility to fight the next economic downturn.
Although the gold market may remain vulnerable to changes in risk appetite as well as headline risk, the bigger picture for the market remains solid. Ongoing geopolitical uncertainties, rising sovereign debt levels and an aging expansion and equity bull market are all issues that could keep gold on the offensive in the months and years ahead. Household debt is also becoming an issue. It was reported today that U.S. household debt reached a record $14 trillion. Of concern is the fact that credit card borrowers have continued to go into delinquency in rising numbers, a trend that has been in place since 2016. The increase in credit card delinquencies could be due to student loans, as more and more borrowers are unable to service their college debt or are forced to do so at the expense of other debt types. The gold market could potentially spend more time trading sideways as it prepares for a large upside breakout. The bulls are targeting a breakout above the $1600 region on a closing basis, while the bears are looking for a breakdown below $1550 and then $1500 to attract further selling momentum.