The gold market continues to see selling pressure as the market searches for a bottom. Although the big, round $1200 per-ounce level is not far off, the market may need to do more work on the downside before it is able to build a long-term base. Low summer trading volumes and scant risk aversion are not doing the market any favors.
The issue of global trade remains at the forefront of investors’ attention, and Iran could potentially be the next major geopolitical shoe to drop. The Trump administration has decided to bring back sanctions against the country that were previously lifted during the Obama administration. There has already been some tough rhetoric between the two nations, and it has been reported that Iranians are buying and hoarding gold for fear of an economic collapse in the country.
The U.S. Federal Reserve met recently for its regularly scheduled policy meeting. The central bank, as expected, did not take any action at this last meeting. It did, however, set the stage for another rate hike next month. Despite some recent commentary from U.S. President Donald Trump, the Fed appears ready to stay the course with its plans for another two rate hikes this year.
The central bank may, however, need to reconsider its plans for next year. Currently, the Fed has penciled in another three rate hikes in 2019, but whether or not it actually follows-through on those plans is quickly becoming a topic of debate. The effects of a potential trade war, higher oil prices and other issues could potentially alter the bank’s rate trajectory.
As the gold market hovers around a 12-month low, the dollar index is hovering around a 12-month high. This is almost certainly not by coincidence, and dollar strength seen in recent months has likely played a major role in gold’s lack of upside. The dollar could quickly be approaching a top, however, as the economic effects of tax cuts and fiscal spending begin to wear off. With the U.S. running massive fiscal deficits, the dollar could eventually roll back over and embark on a significant leg lower.
On Friday, the U.S. will release the latest reading on consumer prices. The Consumer Price Index, or CPI, will likely show a rise in the month of July that is consistent with a pickup in inflation. A rise in this key gauge would almost certainly cement another two hikes from the Fed this year. This, in turn, could keep the dollar supported for the time being and keep the gold market on the defensive.
Sentiment surrounding the gold market is decidedly bearish, and could be approaching an extreme. According to recent CFTC data, hedge funds continue to pile into the short gold trade. Short positioning increased for the fifth week in a row, and the bulls have not had a lot to cheer about in recent months. This does, however, make the market ripe for a short-squeeze rally that could potentially shake out many of the current shorts.
Such a rally could prove to be short-lived without a change in current market dynamics. That being said, however, gold prices at or below current levels could represent an excellent long-term value for the patient investor.