New Highs May be Seen

The gold market is slightly lower in early grade Monday, but remains firmly above the key $1400 level. The market may simply be taking a breather before it begins another leg higher.

Overnight, fresh GDP data out of China showed the slowest growth in the country in 27 years. The market reaction has been muted thus far, however, as some key data points for June were more encouraging than expected. The significant slowdown in GDP is clearly a cause for concern, especially at a time when China and the U.S. are engaged in an ongoing war over trade.

There have been little, if any, signs of progress on trade in recent weeks. Both sides appear unwilling to budge, and additional tariffs could be implemented. The trade war has already had a measurable effect on the economies of both countries, and it even has the potential to put the global economy into recession.

The Fed has already alluded to lower interest rates, and it is widely expected that the central bank will cut rates at its meeting later this month.

While expectations for a 50-basis point cut have diminished significantly, the central bank could still make such a cut to create a larger effect on markets. If the central bank sticks with a 25-basis point cut, it would likely be the first of a series of cuts that could potentially see rates go back towards zero.

The dollar index has acted as a significant roadblock to higher gold in recent months, but that could change in the weeks and months ahead. The effects of tax cuts and government spending that had fueled a strong dollar rise are fading quickly, and an increasingly dovish Fed could send the currency sharply lower by aggressive easing. If the central bank is forced to begin some form of QE again, that too could have a significant, negative effect on the greenback.

As the dollar teeters on the verge of a sharp breakdown, the gold market appears ready to blast off.

The market has maintained trade above the psychologically important $1400 level, and thus far has seen aggressive buying on any dips. The market appears to be in a consolidation phase currently, and the next major test will be the June highs near $1420 per-ounce. An upside breach out of this level could set the stage for a sharp and rapid rally to the $1600 area. From there, the market could challenge previous all-time highs near $2000 per-ounce.

The potential for a global recession, the ongoing war on trade, an increasingly dovish Fed and a weaker dollar may be the perfect recipe for higher gold prices. That makes now the ideal time to get involved.

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