A Lot Going On

Stocks have been on the rise in recent days as investors look forward to a rate cut by the Fed at the end of the month. Although expectations for a 50-basis point cut have declined significantly, such a move may still be on the table. If the Fed decides to cut by 25-basis points, that cut could be just the first in a series of cuts the Fed may have to make in the months ahead.

Regardless of what the Fed does or doesn’t do, there are numerous issues going on that may keep the gold market on the offensive.

U.S./Iranian tensions are on the rise following last week’s capture of a British oil tanker by Iranian military forces. The seizure was reportedly in response to the capture of an Iranian ship by British forces earlier in the month. At risk is the Strait of Hormuz, a highly strategic choke-point. Some 20 percent of the globe’s oil supply travels through the strait, and any supply disruptions could potentially create an oil shock that could see prices rise substantially. A sudden and significant increase in oil could put the global economy into recession. Of course, any military action would not be a good situation either and could have a significant impact on global financial markets.

The ongoing U.S./China trade war looks set to continue. It seems little to no progress has been made in recent weeks, and both sides appear ready to hold their positions. A lack of progress could potentially lead to a raising of current tariffs or even additional measures being implemented. In fact, President Trump could look to ratchet up the pressure on China by taking such action while looking to the Fed to lower rates and boost domestic demand.

Speaking of rates, the Fed will cut rates next week in what may be the first of a series of cuts.

The global economy is showing clear signs of a slowdown, and the ongoing trade war isn’t helping. Key pieces of economic data, including manufacturing and the housing sector, have shown some serious cracks and the current expansion may be on its last legs. The Fed will try combat the accelerating slowdown through a series of rate cuts, but with rates already low to begin with it has little ammunition to work with. This could potentially lead to a fresh round of QE, in a move that may keep stocks from falling through the floor at the expense of the dollar.

The current combination of economic and geopolitical risks and an increasingly dovish posture by global central banks may keep the gold market moving higher, much higher. Hungry investors are already stepping in to buy any dips, and the market may soon embark on a significant upside breakout that could see prices challenge previous all-time highs or beyond.

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