Assessing gold variables
As we saw in the previous parts of this series, the US economy is showing mixed signals. The lack of wage growth remains one of the important missing pieces of the improving US labor markets. Industrial activity is also slowing down. Improved outlook elsewhere, particularly in the Eurozone, could lead investors to these markets. This would be negative for the US dollar.
The Fed rate hike expectation has been one of the biggest factors driving gold prices for some time. Interest rates have been near zero since 2008. An interest rate hike would be negative for an asset that isn’t yielding any income. It leads investors to better interest yielding asset classes like equities and bonds.
A rate hike would be negative for gold prices (GLD) and precious metals stocks including Primero Mining (PPP), Coeur D’Alene Mines (CDE), Pan American Silver (PAAS), and Agnico Eagle Mines (AEM). Agnico Eagle Mines forms 5% of the VanEck Vectors Gold Miners ETF (GDX). However, the Fed rate hike doesn’t seem to be in the cards anytime soon.
Gold outlook is range bound
Last week, gold gained on the concerns that Greece might have to exit the euro or default due to the conditions laid out by Eurozone officials. Now, after the negotiation between Greece and the Eurozone, the chances of a Greek exit from the euro are declining. This would impact the demand for gold as a safe haven asset.
In contrast, after a mixed employment report for April, the Fed isn’t expected to hike rates anytime soon. Economists are expecting the hike to be done in at least September, if not later—based on the current trends. This should support gold prices.
However, in the absence of any near-term catalyst, gold prices are expected to trade in a range-bound zone for the short term.
For the latest updates, visit Market Realist’s Gold ETFs page.