This week has been a roller coaster of volatility and uncertainty. The equities markets have seen a great deal of selling pressure this past week. The selling pressure has been blamed on multiple factors including possible unwinding of hedge fund long positions, economic worries, ebola and geopolitical factors. Whatever the reasoning may be, the stock market has been hit hard but may begin to find a bottom. As for gold, the gold bulls have put together a rally after the yellow metal tested the range bottom in the $1183 area recently. The market rallied sharply off that level as shorts got squeezed and some fresh longs entered the market. The question now becomes whether or not gold can maintain some upside and put together a sustainable rally. It is likely that gold will not attract a great deal of fresh buying interest unless the metal can rise back above the $1300 level.
It is worth noting that recent bearish sentiment in gold could work in the metal’s favor. The last time bearishness reached recent levels was last December and gold then proceeded to rise sharply. A $100-$200 per ounce rally here certainly would not be out of the question.
Some recent signals from the Fed may also work in gold’s favor. The Fed minutes last week had a decidedly dovish tone to them. The Fed cited a stronger dollar and other factors that could drive an economic slowdown. The central bank reiterated that short term rates would stay low. Yesterday, Federal Reserve Bank of St. Louis President James Bullard stated that perhaps the Fed should reconsider ending its QE program. His comments were likely one of the main factors that brought stocks back from the brink of another significant washout day. These comments, along with the Fed’s recent comments could be considered bullish for gold.
Stocks and gold will have plenty to consider for the time being. The recent collapse in energy prices has some countries on edge. In addition, there are signs of trouble brewing again in the Euro zone that could potentially have far-reaching effects on world markets.Rising Greek bond yields are a cause for concern, and should yields continue to climb the Euro zone may once again become the center of attention. The EU continues to battle deflationary pressures, and markets already seem to be looking for more action for the ECB.
Gold will likely watch the stock market closely here. Signs of further volatility and downside in equities could potentially drive buying in gold and other perceived safe-haven assets. In addition, markets will continue to monitor developments with regards to ebola and geopolitical factors. For now, the gold bulls still have much to prove.
