In the world of commodity markets, whenever an asset undergoes a breakout from its existing pattern, it reflects the change in the market sentiment. Gold prices witnessed such an instance on February 28. The value had stepped on a bullish trend from November 13, 2018 with sporadic instances of retracement along the pattern. However, the prices witnessed a breakout from developing patterns. In hindsight, this is an important breakout where the market sentiment seems to be observing a shift with bearish elements overlapping the bullish elements.
In the last few years, the bullion has lacked volatility. Since mid-2013, gold has remained in a tight price channel between $1100 and $1380 per troy ounce. The prices had skyrocketed during BREXIT and the US elections but the $1400 per troy ounce target was time and again tested but not breached. Similarly, the prices slumped during the stated period but could not break the $1100 per troy ounce given the perpetual statements of dovish nature from the world’s big three central banks.
The bullion could not get any traction on the upper side because the Fed was the least dovish of the three and the greenback was strong on a relative basis. However, over the last three months, something seems to have changed which could signal that the current volatility could gather pace.
After November 2018, the markets have observed a significant shift in the market’s attitude towards US domestic economic expansion. Weakening data and corporate earnings along with a continuous flat yield curve have caused some market pundits to predict that the next recession is around the corner. Another school of thought are dwelling on the contrary but it is certainly worth a look into current drivers of the economic slowdown and the subsequent effect on assets like the US Dollar, interest rates and more importantly gold.
The numero uno on the list is the ongoing trade discussions between China and the US. While the spotlight was focused on the summit between Donald Trump and Kim Jong-un in Vietnam, likely repercussions were observed on trade embargos. Market analysts have stated that the situation will persist and it will factor as a constant headwind for economic growth. This along with the probability of additional tariffs has caused major market concern.
Another developing factor is the BREXIT situation. Both the GBP and EUR have had significant moves lowering over the last year. This was due to the constant stream of negative news and uncertainties from the underlying negotiations. Also to be taken into account is the US debt ceiling talks and a possible shutdown, although, this will not take the centre stage as compared to the former two.
What will be the fundamental factors that could push gold above the $1400 per troy ounce mark? The Central Bank of the USA, the Federal Reserve, could support given its dovish tone. Gold hates the high rates since it makes the asset more expensive to hold a zero-yield asset in comparison. In the Fed’s recent statement of overturning a hawkish stance to a ‘data dependent,’ one has driven the gold prices to a rally of 10%. However, it has a catch. If the Fed’s change of stance is caused by problems in Asia or Europe, the greenback could appreciate since the value is primarily measured against the JPY and EUR respectively.
The best case scenario for gold could be if the Fed moved towards easing on the back of the weakening US economy. Likewise, the dollar would lose its shine and the rates would move lower. Also, if the economy weakens further and it appears to persist and require the central bank intervention along the way, gold could swiftly shift to an appealing and ‘must have’ asset by the end of 2019. Inflation could be a counterbalance for gold. The reason is that the Fed would move back towards tightening at the first signs of inflation.
There is also a likely scenario that the US equity prices, reflected by the index of S&P 500, Nasdaq and Dow Jones, decline to a level sending the markets on a panic mode. This development of events could cause traders to switch to alternative instruments like gold and would inevitably involve a further Fed ease tool which would add fuel to the bullish rally.
The market for gold is summoning a plethora of factors in the ensuing days. The traders need to stay on high alert to catch the trend when it develops or else leave reflecting on the missed opportunity!