The gold market is holding steady in early Monday action as the bulls look to build upon last week’s positive momentum. The market is holding some minor gains even after the release of stronger-than-expected ISM Manufacturing data. In addition to some weak data seen last week, the gold bulls may also be seeing some benefit from a large amount of short covering. The gold market is also seeing some bargain hunters enter the market after prices hit a 15-month low in July.
Stocks are lower in early action Monday as they may see a corrective pullback following a very strong July showing. Stocks are in near-term uptrends on the daily chart as investor appetite for risk has improved.
Key outside markets may also be affecting gold today. The crude oil market is lower and is maintaining trade under $100 per barrel. The dollar is a bit lower today as well while the 10-year Note fetches a yield of 2.681%. Yields have fallen significantly from well over the 3% level a few weeks ago. Any further erosion of yields could be bullish for gold as it may limit any perceived opportunity cost.
The gold and silver markets could be vastly underpriced going into the second half of the year. The metals had an abysmal first half to the year as the Fed aggressively raised interest rates and spouted hawkish rhetoric. The bulls could have some room to run here following the recent 2% rally from the lows.
Shifting Rate Expectations
Interest rate and Fed expectations could also be seeing some change. Fed Chairman Jerome Powell left the door open to what the central bank could do at its next meeting in September. While Powell seems determined to bet inflation under control, he also seemingly acknowledged the harm that higher rates could do to the economy.
Given the recession potential in the U.S., Powell and the Fed could elect to hike rates at a far slower pace going forward. They could also decide to not hike at all and to take a wait-and-see approach for a few months to determine how previous rate hikes are affecting the economy.
The two-month period of time from now until the FOMC meets again could give gold plenty of time to rally higher. During this two-month period, investors will watch the data stream closely. Any signs of inflation having peaked or of data coming out worse-than-expected could fuel significant changes in the interest rate outlook.
Should the outlook for rates see some changes in the weeks ahead, it could have a dramatic impact on financial markets. Gold has been held down by the notion of an aggressive Fed raising rates quickly throughout the year. Anything that contradicts that opinion could send gold sharply higher.
The Dollar Index
The dollar has also seen benefits from the interest rate outlook. The greenback recently hit a 20-year high on the idea of higher rates and growing rate differentials. Should higher rates become less likely in the weeks ahead, the dollar could lose significant ground. If the dollar were to weaken, it could also send gold sharply higher as it makes it less expensive for foreign buyers.
The strong dollar has likely been a major roadblock to higher gold for months now. Should the currency begin to show signs of easing, gold could react and react quickly.
The technical outlook for gold has not changed much in recent weeks. The bears are still needing to produce a close below the $1700 level. The bulls need a close above $1800. Having already taken prices above the $1750 mark, the bulls could be set to challenge the $1800 level in the days ahead, possibly even this week. Should they produce a close above this level, a fresh wave of buyers may enter the market. Shorts would also be forced to cover positions, possibly fueling even more upside.
After an extended period in which volatility dried up considerably, the market is now on the move again. A rapid volatility expansion could send gold sharply higher in the coming weeks, leaving the $1700 area behind as it goes.