The Uncertainty in Gold can Lead to an Aggressive Breakout before the End of the Year
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While gold has gained more than 11% year-to-date, things have ground to a halt in recent weeks. The lack of direction comes amidst an uncertain environment for the bulls and the bears. Bearish drivers for gold have included the resilience of the global equity markets, with a solid earnings season out of the U.S. coupled with solid macroeconomic data. The U.S majors have continued to hover close to record levels in spite of rising concerns over the tax reform bill. Added to the downside is market sentiment towards FED monetary policy.
Expectations were for gold prices to find support from the selection of Jerome Powell as the next FED Chair. While the markets consider Powell to steer the FED on its current rate path, there has been some hawkish commentary from FOMC members of late. In the early hours of Monday, Philly FED President Harker not only said that he would support a December hike but also projected three rate hikes for next year.
Off Harker’s hawkish commentary, the Dollar found some strength in the early part of the day before easing back, the Dollar Spot Index hitting an intraday high 94.641, though things are not so cut and dry for the Dollar.
The tax reform bill has taken center stage in recent weeks and, while the administration had talked of the bill being rolled out before Thanksgiving, disagreements between the Senate and the House of Representatives raised doubts over a corporate tax cut before 2019.
A failure of the tax reform bill would be the golden egg. With the U.S administration having yet to deliver on growth policies pledged during the campaign trail, a failure of the Republicans to be able to agree on tax reforms will likely shut the door on growth policies for the foreseeable future. Such an outcome would undoubtedly lead to a significant fall in support for the Republicans. Trump may be to blame for his lack of ability in bringing cohesion to the party. The U.S president may also need to ease back on his claim on the equity market rallies, which could well go into reverse in response.
Adding to gold’s allure would be the ongoing geopolitical tension between the U.S and North Korea and then there is the Middle East, where it’s started to boil. The U.S has now made its bed with the Saudis, who have raised tensions over Lebanon Prime Minister Hariri’s resignation.
Any hint of military action against the North Koreans or Iran and the Shia divide that has eaten away at stability within the region would undoubtedly break gold’s deadlock.
Recent direction suggests that gold has been more susceptible to sentiment towards monetary policy than demand for the safe havens. The caveat here is that, while there’s been plenty of talk on North Korea and even Iran, the markets may actually yet believe that anything more material will evolve. On this basis, the possibility of an escalation in either region is likely to be significantly under-priced.
For now, it’s likely to be a challenge for gold to break out of its current range and make a run for $1,300, barring a material event. With the British Prime Minister’s position and progress on Brexit talks now under threat, Dollar strength will be another hindrance for gold.
All is not about the gold bulls, however, any decline remains on hold as global equity market resilience remains tested at the start of the week. The declines certainly a reflection of market sentiment towards the progress on tax reforms and unease at current valuations.
With the U.S president expected to be back in the U.S before the holidays, how he tackles the differences within his party will be of significance.
Gold’s sensitivity to the yield curve was all too evident last Friday when gold tumbled more than 1% in a sell-off triggered by trades of 40,000, 100 ounces contracts within a matter of minutes. Stop losses were triggered and it was reported that the number of contracts had reached 63.384 within 30-minutes. There was no apparent market event to account for the trades at the time.
Economic data out of the U.S this week, which includes October’s inflation and retail sales figures will influence. But, while sensitivity to the yield curve is there, gold may have been taking a wait-and-see approach on tax reforms.
As things stand bias looks tilted to the upside and all will be revealed this week on the data front and on tax reforms, which should provide gold with some direction through to the end of the year. Solid data and signs of progress on the tax reform bill could see gold test $1,251 support levels, should it break below $1,265.