This is an important week for bullion investors. On Friday, the Labor Department will release the July jobs report. After a the surprisingly weak jobs report for the month of May, the labor market was back on track in June. The May jobs report was certainly an exception. The consensus forecast is for 185,000 job additions. Any positive surprises and we could see arguments in favor of a September rate hike. Even a steady jobs report would strengthen the case for at least one rate hike in 2016. But a rate hike will not weaken the investment case for gold. In fact, the medium-term, I remain bullish on the precious metal.
Gold Attractive On Any Dip
Bill Gross, in his investment outlook, noted that gold was one of the most attractive assets out there right now. Considering that low yield environment, there isn't significant opportunity cost in holding gold. But the precious metal has already had an excellent run this year. Year-to-date, the SPDR Gold Trust (NYSEARCA:GLD) has now gained nearly 28%. The Market Vectors Gold Miners (ETF) (NYSEARCA:GDX), which is essentially a leveraged bet on gold prices, is now up more than 126% this year. Given the run, the question is whether gold has further upside. I believe it still has upside in the medium-term although bulls should look for dips as opportunities to buy to minimize downside risk.
Reasons To Remain Bullish On Gold
I discussed the Fed's last FOMC in a recent article. As I noted, the language suggested, the Fed is open to a September rate hike. But since the meeting, there has been some disappointing economic data. The second-quarter GDP growth was well below consensus forecast. But more important is the inflation data. On Tuesday, the personal-consumption expenditures price index, which is the Fed's preferred inflation measure, showed an increase of just 0.1% in the month of June compared to the previous month. When compared to the year earlier period, the index was up 0.9%, well below the Fed's target inflation rate of 2%.
In its last FOMC, the Fed once again emphasized its concerns about inflation. The Fed noted that it will carefully monitor actual and expected progress towards its inflation. Given that we are still way off that goal, I don't expect a hawkish Fed. While we might still get a rate hike this year, the pace of rate hikes is going to be gradual in all likelihood, which is a positive for gold. Also, a rate hike would mean more money pouring into U.S. Treasuries. That should again further reduce the opportunity cost of holding gold.
The second reason is European banks. European bank stocks began the month of August on a disastrous note. The main concern is the banking crisis in Italy. But the market has also been worried about the impact on negative interest rates on European banks. Some of those concerns have been eased after some European banks reported solid earnings this week. However, the solid earnings are not likely to overshadow concerns over the state of Italian banks.
Ahead Of Meeting
While there is a strong case for remaining bullish on gold in the medium term, I would look at a lower entry point in both GLD and GDX. That opportunity could come this Friday. Despite the weak Q2 GDP data, the July jobs report is expected to be strong. That will strengthen the case for a September rate hike and will be negative for gold in the near-term. However, a pullback would create an opportunity to enter GLD and GDX.
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