The gold market continues to consolidate around the $1200 level, and that may be a good thing. The market has remained under pressure for some time now, although recent price action could suggest that sellers have simply run out of ammo. At this point, the longer the market moves sideways the larger and more significant an eventual breakout may be and such a move would likely take place to the upside.
Investor appetite for risk is strong to start the week, with stocks moving higher in early Monday action. Markets have done a fantastic job of shrugging off many of the economic worries currently being seen, although just how much longer they will be able to do so is a critical question.
September is a historically tricky month for stocks, and this time around may prove to be no different. The equity markets are facing some significant headwinds, and with the U.S. mid-term elections rapidly approaching, things could get a lot dicier as volatility increases and as investors take some money off the table.
The Fed could play a major role in price action as well in the weeks ahead. It is widely expected that the central bank will hike its key interest rate again this month, and another move is still expected from the Fed before the end of the year. Although a December hike has come under increasing scrutiny, odds still look strong for the Fed to take further action. This has some analysts concerned, however, and some have even suggested that the central bank should keep rates at current levels.
Although higher rates could have an impact on stocks, possibly applying the brakes to higher prices, the bigger picture is a lot more concerning. Even with several more 25 basis point hikes, the Fed Funds rate would still be quite low. Given the low level of rates, the central bank may not have as many tools in the toolbox to effectively fight the next recession. It has been suggested that the next recession could be deeper and longer than the previous, and the Fed could essentially have its hands tied lacking the ability to lower rates enough to achieve the desired effect.
Such a scenario could potentially open the door to another round of QE, and some have even floated the idea of the Fed buying stocks or other premium assets. Whatever the case may be, the road ahead could certainly prove to be very bumpy, and complacent stock investors could bear the brunt of a rapid and significant decline in equity prices.
The dollar, which has without question played a key role in gold’s lack of upside, could also get hit hard. A major reversal in the currency could add fuel to the fire as investors seek out alternative asset classes and perceived safe havens.
It is impossible to say when-or if-such a scenario will unfold. There are numerous alarm bells already ringing loud, however, and it is up to investors to take heed. Given the current state of geopolitics and what are likely the late innings of the current economic expansion, the gold market could provide an excellent long-term value at current price levels and could see a protracted bull market get underway once the next recession takes hold.