Posted on January 29, 2016
Gold prices are slightly higher in late morning trade today as equities rocket higher, crude oil rises and the dollar index moves sharply higher.
Overnight, the Bank of Japan stunned financial markets by announcing a move to negative interest rates. This is another bold move by the Bank of Japan intended to stimulate its economy fight ongoing deflationary pressures.
The BoJ is clearly intent on doing whatever it needs to do to achieve a 2% inflation target. The country has been battling deflation since the 90s and these forces are considered the root cause of Japan’s economic struggles for the last twenty years.
The move comes at a time when the threat of global deflation appears to be increasing. Crude oil prices have rebounded in recent trade but are still vulnerable to further downside. The Chinese economy continues to struggle and commodity prices could potentially see further declines. The BoJ is likely trying to stay ahead of the curve if prices do fall further, although how effective such a measure may be remains unclear.
The move by the BoJ could potentially affect any further rate hikes by the Fed this year. There is already widespread discussion on the prospects of further rate hikes by the central bank. While analysts were looking for four hikes this year, some now believe that number may be only two.
Although the dollar is stronger today on the BoJ news, gold is holding its own today. This move could further alter interest rate expectations in the U.S. and could potentially boost gold prices even with a stronger greenback. While the U.S. has begun the move away from its zero interest rate policy, other nations are still very much in the trenches using QE and other measures to fight economic strain.
This disconnect between the U .S. and other nations could potentially fuel some ongoing volatility in equity, currency and interest rate markets.
Gold prices are near three month highs and the bulls have gained some upside technical momentum. A move to the $1160 area could potentially be in the cards, and given its recent trend higher, any dips in gld may be bought. The market is trading firmly above the $1100 level, and investor sentiment seems to be improving significantly.
Gold investors will likely remain focused on the potential threat of deflation and will also monitor any commentary from the Fed on interest rates. In addition, if risk aversion takes further hold in equity markets, gold could potentially stand to benefit if investors seek out alternatives.