The gold market has a number of things going for it currently that could make recent upside more sustainable. The potential for rising inflation, a weaker dollar and ongoing geopolitical tensions are just a few of the issues that could keep the gold market on the offensive.
The shutdown of the U.S. Government on Saturday could also have a significant impact on prices this week. Although many seemed to believe that it wouldn’t come to this, U.S. lawmakers were unable to come to an agreement to keep the government funded beyond Saturday. The shutdown affects numerous areas of government, although several key responsibilities such as military readiness and air traffic control will be maintained.
The U.S. Government was last shutdown five years ago, and it took two weeks for a funding deal to be reached. During that time, thousands of federal workers were furloughed, and many government services ground to a halt once they ran out of operating cash.
The inability of Republicans and Democrats to make a deal will likely add to already-increasing anxieties over the willingness of both parties to work together on key issues. Both sides have stood their ground thus far over the weekend, and it appears that a deal may not be seen anytime soon.
The potential for a shutdown took the dollar lower last week, with many traders apparently looking to put on a “just in case” trade.
The potential effects of an ongoing shutdown could be significant for the greenback, which remains near three year lows. The dollar has been trending lower in recent months, and could potentially see another sharp decline below longer-term support. Further dollar weakness could keep gold buyers very motivated, and the metal may also benefit from an increasing flight to safety mentality.
This week could be an interesting one, with rising market volatility and increasing levels of investor uncertainty. Oddly enough, stocks finished the Friday session sharply higher, although that may have been due to optimism over a deal being reached to avert the shutdown. This week could see a very different attitude towards equities and risk assets, and investors will be looking for progress in the funding negotiations. Without it, a risk-off scenario could lead to a stock market sell-off, with investors seeking alternatives or even parking cash on the sidelines.
The shutdown will also delay the release of key pieces of U.S. economic data, effectively leaving investors in the dark. Although the economic effects of the shutdown may be relatively muted, the longer it continues the more serious those effects could potentially be.
Gold did see an end to its five-week winning streak last week, but this may actually be healthy for the market. Prices had seen some rapid acceleration to the upside, and a little back-and-fill-price action could set the stage for another surge higher. Ongoing U.S. political issues along with rising inflation are likely to keep the market on firm footing. That being said, investors will likely step in to buy any significant dips unless proven otherwise.