The gold market has been trending lower over the last few weeks as numerous issues stand in the way of higher prices. The market appears to be lacking any fresh, bullish catalyst currently, and the increasingly hawkish tone coming from central banks is not helping either.
The U.S. Federal reserve recently raised interest rates again, and has thus far stuck with its forecast for another rate hike before the end of the year. Other central banks have also begun talking about normalizing monetary policy, with even the ECB sounding more hawkish than any time in recent memory.
Although hawkish rhetoric has, and may continue to weigh on gold prices, you have to wonder if perhaps policy makers may be getting a bit ahead of themselves. After all, 2016 was supposed to see four rate hikes from the U.S. Fed but only saw one. Could such a scenario be seen again?
Yes- economic growth has been on the rise. Yes-stocks are near all-time highs and could keep moving higher. Yes- risk appetite seems to be quite robust.
The economy remains on some less than solid ground. Some key measures have shown strong improvement while others have simply shown little to no real improvement. Perhaps most important; inflation remains to be seen.
The lack of inflation could potentially allow the Fed and other central banks to keep their feet on the gas pedal longer than currently anticipated. You could also make the argument that these banks are raising rates only to have the flexibility to lower them again later.
Fed Chairwoman Janet Yellen will be giving her semiannual testimony before the House Financial Services Committee this week. Although the subject of inflation may be addressed, investors will likely be focused on the Fed’s concerns over rising asset prices and stubbornly low treasury yields. The question may be whether or not the central bank is ready to take action to prevent any further overheating. Given the market’s upward trajectory, however, it may take some very harsh rhetoric from the central bank to derail the equities rally at this point.
The current geopolitical landscape, while quiet right now, has the potential to have a significant impact on global markets. North Korea, in particular, is a problem that is not going to simply go away. Any further escalation in tensions could fuel a stock market sell-off and broad flight to safety. Ongoing domestic issues in the U.S. could also drive risk aversion, as investors may begin to lose patience regarding new legislation for health care, tax reform and fiscal spending.
The bottom line is that the current state of quiet is not likely to continue indefinitely. Volatility may begin to rise, and as it does it may fuel capital outflows in risk assets while stoking inflows into perceived safe haven assets like gold.
Any dips in gold from current levels may potentially be viewed as a buying opportunity, and the market could possibly be setting up for a major rally once the aging bull market in stocks has run its course.
Ms. Yellen’s testimony this week will likely be the main driver for price action in the gold market, and could potentially cause a major shift in investor sentiment.