The gold market is slightly higher in early Monday action as the bulls look to regain control of the market. The market has quite possibly entered a longer consolidation phase in which prices remain mostly sideways for an extended period. A downturn in risk aversion is also having an effect, as investors look past the raging viral pandemic and hope for a credible vaccine to be brought to market sooner rather than later. Whether a vaccine is discovered or not, it remains unlikely that nations will enter into another full-scale lockdown to combat the spread of the virus.
Outside markets for gold today are in a bullish posture. Crude oil is moving higher, near $43.50 per barrel, while the U.S. Dollar index moves lower, maintaining price action near a two-year low. The weaker dollar has likely been a major contributor to gold’s upside in recent months, and a further downside breakdown in the greenback could set the stage for a significant run higher in gold, silver and other metals.
The dollar certainly has a variety of forces working against it currently. Not only is the U.S. way, way in debt, but the Federal Reserve is now keeping interest rates at zero once again, while printing an unlimited amount of dollars through QE. Although a weaker dollar may benefit the government as it pertains to debt payments, it is not beneficial to the average American or user of the currency. As the dollar declines in value, it tanks more and more of them to purchase everyday goods and services. This fuels the effect of making things increasingly expensive, eroding discretionary incomes in the process. Not only that, but even net investment returns are eroded as they cannot escape the negative effects of a weaker dollar.
As Americans and users of the dollar feel the pinch from a decline in value, it can have a significant, negative impact on the economy as a whole. As everyday goods and services become increasingly expensive, people will begin to look to save money, spending less in the process. This downturn in spending can weigh heavily on the economy, as the economy is primarily driven by consumer spending. This reduction in household spending can, in turn, lead to an economic recession if severe enough.
Not only is the greenback being forced to deal with the negativity of zero percent rates and QE, but it must now also contend with a change in the Fed’s thinking. Last week, the central bank announced that it would shift its inflation mandate and would look to see inflation rise above its desired 2% target for a period of time. Rising inflation, combined with all the other bearish dollar issues, could be enough to send the greenback on a fresh and significant leg lower. This dollar downside could fuel a sharp rise in some dollar-denominated asset classes, including gold and silver, and could become the primary catalyst for $3000 or $5000 per ounce gold prices.