Spot gold prices are trading sharply lower here on Friday. Spot gold was last quoted at $1438.50 per ounce. This is the most action prices have seen all week. This past week was extremely light in terms of data releases and the market has been trading sideways until today. There appear to be a number of factors at work right now that are driving gold bullion prices lower. From a fundamental standpoint, one can make a very strong argument for stronger gold prices as well as weaker gold prices.
Now we don’t believe the long term bull market in bullion is over by a long-shot, but currently the market is facing some headwinds as some potentially big changes come down the pike. By changes, we are referring to central bank policies as well as the potential for a full blown currency war. There has been widespread speculation in recent weeks about if and when the fed may begin removing the punchbowl. The economic data being released appears to show some significant improvements.
Now many may scrutinize this data, but the fact is that investors are drinking the kool-aid and the equities markets continue to climb. Will this continue indefinitely? We don’t think so. We believe this may just be another “cycle” of risk taking. In our opinion, it will eventually come to an end-but no one knows when. In the meantime, it is seeming increasingly unlikely that the fed expands its bond buying and it is also seeming more and more likely that we are nearing the end of QE.
There has been some more hawkish talk from fed governors, and when they talk the markets listen. This, among other things, has caused the dollar rally to continue. As long as the dollar continues to strengthen, the pressure may stay on gold prices, and commodity prices in general. The dollar has a lot of room to run to the upside too, and could possibly be one of the biggest roadblocks the gold market faces.
It will be interesting to watch some of the discussion surrounding currencies in the coming weeks. More and more people are talking about the currency war as countries try to revive their economies. The yen broke under the 100 level this week for the first time in 4 years, and the Australian dollar which is a commodity sensitive currency is breaking down from a nearly year long trading range. This could indicate rough sailing ahead for commodities as inflation levels continue to run below targets.
No one can say for sure how this will all affect gold prices, but for now it seems that a re-test of the April lows is in store and that long term investors may get an opportunity to add to physical holdings at even lower price levels.
