April 24 – Where’s Gold Going?

Yesterday’s Highlights:

1.)    Another wave of positive corporate earnings surprises boosted investor confidence and lifted the S&P back to its September 2018 all time high at around $2930. This non-stop bullish momentum has been powered by a continuous stream of positive macro economic news coming out of US and China, as well as a more accommodative stance from the Fed.

2.)    Gold prices took a dive in the morning trading session but recovered by around 0.5% by market close. The initial sell off was due to the positive market sentiment for equities, and also the bullish momentum shown in the US dollar today. Gold is likely being supported by a couple reasons:

a.       Renewed uncertainty over Brexit. According to a WSJ article, the UK lawmakers may once again vote for a separation deal next week. If that passes, the Brits can successfully exit the EU and avoid having to participate in the election in late May. However if the deal gets brought to a vote and fails once again, we’ll likely see a new wave of support for gold prices. Stay tuned for more updates over the weekend on Brexit.

b.      Yields are behaving in contrast to the improved market sentiment, with yields down across the curve and the 10 year trading in a tight range over the last few sessions. With yields being capped, gold will be attractive to investors seeking a safe place for their capital.

3.)    An interesting piece of news came out today on WSJ regarding a potential deterioration in Chinese president’s health. During his recent tour of Europe, he was seen walking with a limp and having to hold both arms of the chair when sitting down. This has led to many speculations regarding who will become the next president if Mr. Xi falls can no longer lead due to health reasons. In the article it mentioned that Mr. Xi has not named a successor nor is there a pre-established procedure to selecting the next president. Therefore it is very likely that we see a power struggle internally along with economic instability and policy uncertainty. Although this scenario is most likely at least 5-20 years down the road, it’s still an interesting thought to have especially since the US and China are close to striking a trade deal, a deal that will change the dynamics of trade between the two world powerhouses. 

What to expect today

News just came out saying that US trade reps are heading to China and continuing talks on April 30, with Chinese trade reps scheduled to go to the US in early May. This is a positive sign that talks are still going well and moves the deal a tiny step closer to being signed.

Next big catalyst to watch out for is the GDP numbers coming out on Friday and jobless claims on Thursday.

Gold Price Forecast

Maintain a bearish stance on gold prices until we start seeing signs of potentially negative macro news flow.

Positive catalysts for gold:

1.)    Inflation picks up and surprises to the upside, causing the Fed to consider raising rates.

2.)    Brexit uncertainty doesn’t get resolved and continues to make negative headlines.

3.)    Negative economic data coming out of the US and China

4.)    Negative trade deal news

Negative catalysts for gold:

  1. Positive corporate earnings in the US market. Highly likely due to the low expectations that resulted from the 2018 sell off fears.
  2. Inflation stays relatively stable with moderate growth. Calming the Fed and increases the chance of them keeping their word of not raising rates this year.
  3. Continued US dollar strength on the back of rising US economic projections.
  4. Increased market sentiment towards risky stocks and a further move away from safe haven assets like gold.
  5. Continued positive economic data
  6. Potential signing of the US-China trade deal.

As you can see, the short to medium term outlook for gold is not looking very supportive. However I believe long term direction is still unclear, we could very well see earnings miss later this year if investor sentiment increases too fast and expectations for economic growth are once again hyped up too much.

Gold Priced in USD

Gold Miners

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