Gold Market Could See Major Breakout

Brexit troubles could help clear the path for gold to reach $1,400 an ounce by year's end.

Gold prices have remained virtually unchanged over the past week, even as a surprisingly optimistic jobs report gave the stock market some much-needed breathing room. According to a recent article by Kitco, however, the lack of any real price movement in the gold market may represent a calm before the storm, one that could end in a major breakout.

Gold’s price invariably thrives during times of geopolitical strife, writes Kitco, and there appears to be no shortage of the latter coming from different corners of the globe. Britain's troubles surrounding their exit from the European Union have made the headlines of most outlets in recent days as Theresa May's government appears unable to broker a deal with Brussels.

With the April 12 deadline for a satisfactory agreement fast-approaching, May requested that negotiations be postponed until June 30. According to the article, should the EU dismiss the request, Britain will be forced into a hard exit from the alliance, which could have numerous dire consequences. These include a devaluation of the sterling and even a potential revision of the Irish border.

Although a Brexit extension could help avoid this scenario, it will further erode the trust of British citizens as their parliament struggles to satisfy Brussels, suggests Kitco. The situation plays into existing tensions in the eurozone, which include Italy's opposition to Brussels' budget terms, an ongoing migrant crisis and an increasingly dovish European Central Bank.

The ECB recently downgraded its growth forecast and placed into question the prospect of hiking interest rates this year. An official announcement is scheduled for next week, and confirmation that rates will remain stationary could provide gold with additional leverage.

On the domestic front, the Federal Reserve's dovish turnaround in March already helped boost gold prices. The minutes from the meeting will be released on Wednesday, and market watchers will be looking to scour the transcript for details on just how far the Fed intends to pull back.

Although a potential U.S.-China trade deal could subdue gold prices in the short term, President Trump said that negotiations will likely last for weeks, leaving investors with little certainty. The culmination of the Mueller probe did little to calm domestic political tensions, and Trump's collision with Russia over Vladimir Putin's support of Venezuelan president Nicolas Maduro is yet another source of concern.

Traders are now waiting for next week's CPI and PPI reports, and Kitco says signs of rising inflation would likely translate to immediate short-term gains in gold prices. Over the longer term, gold should receive plenty of support as equities resume their downtrend, said Ross Strachan, senior commodities economist at Capital Economics.

Combined with weaker growth projections in both the U.S. and Europe, Strachan believes the path has been cleared for gold to reach $1,400 an ounce by year's end.

ABN AMRO Predicts Gold to Reach $1,400 Before End of Year

Georgette Boele says gold hasn't lost any luster from the previous months, and its outlook for the rest of the year is still exciting.

As gold moves back and forth across the $1,300 level, Kitco reports that Dutch bank ABN Amro stands by its prediction that the metal will see $1,400 an ounce before the end of the year. Georgette Boele, the bank's coordinator of foreign exchange and precious metals strategy, explained in her latest precious metals report why she sees gold heading higher and higher as the year progresses.

Despite occasional dips, Kitco writes that gold remains comfortably in the green since the start of the year. Furthermore, prices have held their ground above the 200-day moving average even during periods of selling, something Boele sees as very optimistic.

Boele and her firm believe gold hasn't lost any of its luster from the previous months, and that the metal's outlook for the rest of the year is still exciting. Although the troubles in equities have lessened a major hurdle for the gold market, Boele noted that a persistently robust U.S. dollar and a sudden, albeit short-lived, spike in Treasury yields will be gold's main competitors in the near-term.

Nonetheless, the analyst thinks that gold could climb to the $1,365-$1,375 level over the next few months even in the face of these headwinds. Later in the year, Boele expects the pressure from the U.S. dollar to subside, driven largely by a change in policy by the Federal Reserve.

It's hard to argue that years of monetary tightening have weighed on gold, even though the metal's price held up with as many as four rate hikes per year. Many experts think that 2019 will be the year when the Fed finally dials down on its hawkish strategy, or even reverses it, writes Kitco. Boele concurs, adding that the Fed's gradual wrap-up of its hiking cycle will be accompanied by dovishness from other central banks.

The latter point has already been highlighted by the European Central Bank's announcement that it would not raise interest rates for the rest of the year. In the same announcement, the ECB also slashed its growth forecast by a wide margin, which many interpreted as another bullish signal for gold, reports Kitco.

The spike in yields should also prove to be inconsequential, says the article, as analysts have pointed out that Treasuries are on a long-term downwards trajectory, with the yield curve nearing flat status. A flat yield curve signaled the last two market crashes, building on existing concerns that an economic slowdown and a possible recession are on the way.

Gold Has Reason to Shine and Here's Why

Are central banks “increasingly aggressive and counterproductive” policies causing gold to continue to brighten? Here’s why the metal’s shine is likely just getting started.

Gold might have already posted its best quarter since 1986, but hedge fund manager David Einhorn is betting that there's more to gain from the metal: on Tuesday, he spoke with Bloomberg via phone about his views on central bank policies and how they might affect gold.

Einhorn was critical of how central banks are running things and warned about the direction they're headed in: he panned the European Central Bank's record-low borrowing costs, expanded asset purchases and borrowing subsidies, calling these a "kitchen-sink policy". Aside from Europe, Einhorn also touched upon the Bank of Japan's negative interest rates as well as the reduced U.S. rate hike forecasts. According to him, the status quo is good for the metal: "These increasingly aggressive and counterproductive monetary policies are bullish for gold," he said.

Einhorn's comments to Bloomberg echo sentiment from a letter that Greenlight sent to investors yesterday. "The Fed’s 'data dependency' doesn't appear to relate to employment, which continues to improve, or core inflation, which is now running above its two percent target," said the letter. "We believe the increasingly adventurous monetary policy is bullish for gold."

Those familiar with Einhorn and his Greenlight Capital Re Ltd reinsurance company know that they have traditionally held gold in high regard: the metal accounts for nearly 10% of Greenlight's portfolio and Einhorn has long believed that central banking stimulus will fuel inflation and boost gold. Furthermore, Greenlight named gold as one of their five largest disclosed long positions at the end of the first quarter or 2016.

At any rate, the company's faith in the yellow metal seems to be paying off: their stock has maintained stability and their shares have gained 15% this year, helping alleviate the losses from investing in Japanese lender Resona Holdings Inc. which dropped 32% in the first quarter due to the Bank of Japan's negative-rate strategy.

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Is China trying to shape the gold market?

Official casts doubt on Federal Reserve policies

A long-time Fed is worried: "We're not going to be able to hold the line anymore."

In a recent interview with the New York Times, Charles Plosser, president of the Federal Reserve Bank of Philadelphia, voiced some serious concerns over the long-term effects and ramifications of the Fed's ongoing loose monetary policies.

Plosser, whose term as a key policy maker in the bank will end in March, has often criticized the Fed's policies during his nine-year term on the board.

Plosser maintains that history has proven that monetary policy is only a temporary way to assist economic growth and that, once we reach a tipping point with the Federal Reserve's loose monetary policies (such as Quantitative Easing and near-zero interest rates), we will experience significant negative backlashes. Most recently, the European Central Bank experienced this first-hand when the Swiss National Bank de-pegged the franc from the euro, thus sending the value of the euro plummeting. According to Plosser,

"At some point the pressure is going to be too great. The market forces are going to overwhelm us. We're not going to be able to hold the line anymore."

Plosser argues that the idea that low inflation somehow indicates a weak economy was rebutted in the 1970s, and therefore calls for raising short-term interest rates ahead of time – regardless of what the move's effects may be on inflation. By taking such an action, one of his primary hopes is to avoid reaching a point in the future when market forces dictate that the Fed must increase interest rates quickly. Such a scenario could be disastrous to the economy and cause significant volatility.

Plosser also stresses that any monetary or fiscal policies, especially as loose as those of the Federal Reserve, cloud our view of normal market conditions. He argues that we must deal with the economy in a realistic fashion rather than through unrealistic or overzealous application of stimuli. If anything, he believes that most of the Fed's loose policies should have ceased as soon as the financial crisis was over.

One major concern is what the consequences of the Federal Reserve's monetary policy will end up being, especially over the next five to ten years. Plosser claims that the real cost of what the Fed is doing has not yet been determined:

"I think the jury is still out on the costs. Because the cost I was worried about was the longer-term cost of unraveling all of this. So maybe I was right, maybe I was wrong. That remains to be seen."

Once the market realizes that the Fed can no longer keep holding interest rates back in order to increase liquidity, a snap-back in premiums will become unavoidable. This threatens to further plunge the economy into uncertainty and volatility as everyone would suddenly finds themselves with less money.

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Gold hits a 4-month peak

On the back of a stunning move by the Swiss National Bank, the dollar slumps and gold moves higher

No one saw it coming. Switzerland shocked the world last week when it abandoned its three-year cap on the franc. As a result, European shares and bonds yields tumbled and the dollar moved lower. Gold, however, rose to a 4-month high.

According to investment specialists, this rise has can be attributed to the uncertainty prevailing in the market. Ole Hansen, Senior Manager at the Saxo Bank explained, "Gold is gaining from a risk-off situation because nobody expected the Swiss central bank not to keep that cap." According to him, this has created "potential big losses in many places and is obviously triggering some flight to safety."

On the other hand, the dollar fell 0.2% percent and European stocks plummeted as a result of the move from the Swiss National Bank, which many believe was spurred on by the European Central Bank potentially announcing a money-printing program in the coming days.

Hansen further added that this could add more pressure on the euro as all this happened just "a week before the ECB meeting." Because of this, "gold in euro terms" is sure to benefit further.

Since the financial crisis in 2008, central banks have opted for more liquidity. This has over the years has had a very positive impact on the price of gold. The price of Euro-dominated gold rose to its highest level since May 2013 to 1,077.09 euros an ounce.

Though there is still some uncertainty about what the metal will do in the rest of the year, it has risen six percent in just this month.

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