The gold market is getting off to a sluggish start to begin the new trading week. A lack of any fresh, bullish inputs is likely weighing on the yellow metal while also giving some investors reason to book profits.
Although investors will continue to monitor numerous geopolitical issues including the recent U.K. elections and North Korean saber rattling, they will also have plenty of economic data to chew on this week. In fact, U.S. markets will see the latest releases of several key pieces of economic data including PPI, Retail Sales, Empire State Manufacturing, Weekly Jobless Claims and more.
The biggest potential market mover for the week will almost certainly be Wednesday’s FOMC meeting conclusion. It is widely expected that the Federal Reserve will hike interest rates by another 25 basis points-although some analysts have suggested that a surprise could potentially be in store.
The question is whether or not the central bank could decide to delay further tightening until their next meeting. Some recent weakness in key economic data points, along with some signs of cracking in technology stocks could possibly give central bankers something to think about before pulling the trigger on another rate hike.
For the most part, the central bank has stuck to its guns regarding its plans for normalizing monetary policy. There are numerous issues, however, that could force the Fed into rethinking its plans going forward.
Gold has been seeing some steady buying once again in recent action, as geopolitical jitters fuel some flight to safety buying. The market has, however, failed to move above the $1300 level once again-at least for now-and may need to see some upside follow through to attract more fresh buying interest.
The stock market could potentially hold the key to higher gold in the near-term. Recent weakness in the tech sector could potentially be indicative of market exhaustion, and numerous analysts continue to suggest that valuations are at unsustainable levels.
A significant breakdown in stocks could prove to be the catalyst for a major upside breakout in gold and other perceived safe haven assets. Such a breakdown could be driven by several key factors including valuations, geopolitical fears and a perceived lack of progress on the fiscal stimulus front.
The dollar index will also likely be a major factor in the near-term, as the greenback has been trending lower for some time now and has yet to show any significant signs of bottoming out.
The weighted year-end average call for the 10 year treasury yield has also declined again, now standing at a yield of 2.7%. This estimate represents a decline of about 20 basis points from just two months ago, and seems to indicate investors believe that following a hike this week the Fed will then sit on its hands until December.
Numerous political distractions are likely a major factor in lower inflation expectations, and such distractions are likely to be unresolved for some time.
Lower yields, a more dovish Fed and the potential for a stock market reversal may all fuel further upside in gold in the coming weeks and months.