The last several weeks have seen some very encouraging signs for the bulls, and Friday’s session was no exception. Spot gold moved higher by nearly $9.00/oz despite some factors that would typically act as significant headwinds.
The dollar index was stronger on Friday to end the week. Although the currency wasn’t up a huge amount in percentage terms, the rally in gold even as the dollar rose was a breath of fresh air for the bulls. Many of the gold market’s largest net percentage gains or declines in recent months have been the direct result of large moves in the greenback.
Stocks were also higher Friday to cap off the week, and equities went out in dramatic fashion. The benchmark Dow Jones Industrial Average rose by nearly 444 points while the broad-market S&P 500 saw a gain of nearly 30 points. Equities saw strong buying interest as appetite for risk increased. Indications are that ongoing U.S./China talks over trade that took place last week in Beijing were productive and negotiators have now laid out a framework for further talks.
The price action seen in gold and other outside markets to end the week may be considered quite bullish for gold. The metal typically does not see significant strength in the face of a stronger dollar or sharply higher equity prices. Not only that, but the fact that gold was sharply higher despite strong investor appetite for risk may also be very telling.
The gold market is showing some undeniable signs of strength and is being bid higher with or without supportive outside markets. This can only mean one thing: that higher prices are likely ahead as demand strengthens. The recent strength in gold and current uptrend that has been in place for some time now may simply be further indication of an unfolding bull market.
The gold market could still face some obstacles in the weeks and months ahead. Stocks could continue to work higher again; the dollar could strengthen further, and investors may become increasingly comfortable taking on risk. These hurdles would likely prove transitory, however, as numerous key market fundamentals paint a very different picture.
The global economy is slowing, and even with a deal on trade, both the U.S. and China (the world’s first and second-largest economies) could see a very bumpy road ahead. As the next major recession approaches and takes hold, the U.S. and other nations may lack the tools necessary to effectively and swiftly combat the slowdown. Interest rates are still well-below pre-financial crisis levels, and many central bank balance sheets remain overinflated with previous asset purchases.
In short, global central banks could potentially be forced to resort to even riskier and untested measures to fight the next depression. This could not only lead to lower equity and asset prices but could put a significant dent in currency values. Such a scenario has the potential to be extremely bullish for gold and hard assets, and prices could rise substantially from recent levels.
The next several months will provide some important clues about the state of the global economy. If further weakness is seen in the data stream or if stocks again turn decidedly lower, central banks could be forced into action. Some may argue that such a scenario is not only likely, but inevitable. This idea may keep gold on the offensive in the weeks and months ahead as an increasing amount of “smart money” looks diversify in alternative asset classes and avoid the next major collapse in equities.