It appears that the gold market could be making up its mind today as prices are seeing a strong decline following last week’s weakness. Spot gold has now broken down below the key $1800 level and stands around the $1771 area. The bears have indeed built some momentum that is taking prices lower today. Whether that momentum is sustainable is another question.
Higher Gold Obstacles
The dollar hit a fresh 20-year high overnight. The dollar strength is likely the primary factor behind gold’s weakness early this week. As the second half of the year’s trading gets underway, the market could also be seeing some portfolio reshuffling that is causing some to hit the sell button.
Recession and inflation concerns remain the major obstacles for markets in the week ahead. The major data point for this week will be the release of the latest non-farm payroll data due Friday. June is expected to show a rise of some 250,000 jobs, a far cry from the May figure of 390,000 jobs added.
June Jobs Could Move Markets
If the June jobs data does not come in near expectations, the markets could potentially move sharply. A large miss in the jobs data, for example, could possibly adjust expectations for the Fed and its plans regarding interest rate hikes. A miss could be viewed as being “dovish.” A beat on the data could do the same, only in a “hawkish” manner. A better-than-expected jobs figure could allow the Fed to keep hiking rates aggressively or even more aggressively than thought.
The dollar has been, and remains, a major hurdle to higher gold. The greenback hit a 20-year high overnight and is not far from those highs as the day session gets going. A stronger dollar makes gold relatively more expensive for foreign buyers, discouraging buying from these investors. The dollar has been rising on the notion of higher interest rates and an aggressive Fed. How much more the currency may have in the tank, however, is debatable. As long as the dollar is rising, the gold bulls may have limited upside potential. If the currency halts or reverses course and begins to trend lower, it could encourage the gold bulls and fresh buyers to jump in.
A Bearish Case For The Dollar
Despite the Fed’s recent interest rate hikes and possibly even a bullish outlook for rates, the dollar does still have numerous bearish issues that could again weigh it down. Massive sovereign debt levels, for example, could deflate the dollar in the months and years ahead. Not only that but should the Fed eventually decide to reverse course and start lowering rates again, as some believe it will, the dollar could take a nosedive. Whatever the case may be, it may become increasingly challenging to justify a higher dollar as U.S. debt gets further and further out of control. Some analysts have argued, in fact, that the only way the U.S. will ever get its debt problem under control is through currency debasement.
Outside markets on Tuesday are not providing the gold bulls with much help. Crude oil is weaker today, trading around the $108 per barrel level. Yields are also weaker today. The benchmark 10-year Note is now fetching a yield of around 2.89%. The recent decline in yields could be another sign that inflation has already peaked. The dollar is stronger today after notching a 20-year high overnight.
The gold bears are in firm control on the daily chart. After hitting a five-month low late last week, the bears are now trying to follow through today with further declines. Now that support at $1800 has been breached, the bears will likely target the next area of support in the $1750 area. The bulls are on their heels currently and have significant work to do to right the ship. The bulls must first produce a close back above the $1800 level, then above the $1900 level to get momentum going.
The second quarter, which thankfully just came to an end, was unusually brutal for investors. There was literally nowhere to hide, as stocks, bonds, cryptocurrencies, and commodities all got clobbered. The declines for the quarter may have presented investors with some excellent long-term opportunities, however. The gold/silver ratio, for example, rose to the highest level in two years at 90:1. This may indicate that silver is unusually cheap compared to gold and could thus be a great long-term play at current levels.