The gold market has numerous bullish factors currently at work that could potentially take prices sharply higher in the weeks and months ahead. Although the numerous geopolitical headwinds being seen around the globe could play a role in higher gold, there is likely a far more significant issue that could be behind any upside breakout.
The dollar index has struggled to put together any sustainable move to the upside. The currency’s lack of traction has caused the greenback to trade within a range, moving sideways between the 88 and 90 levels. Although the dollar bulls have stopped the bleeding- at least for now, the currency is facing some serious challenges that could not only prohibit any moves higher but could set the stage for a dramatic decline.
The dollar is not far from its recent lows around 88, and another test of the recent lows could give way to a much larger decline. The notion of an even weaker dollar could be the primary force fueling action in the gold market. Despite numerous other bullish inputs, a weaker U.S. currency could propel gold sharply higher from current levels.
A bearish case for the dollar has become quite compelling in recent months. An exploding deficit, relatively low interest rates and the global reflation trade have all weighed on the dollar, and may continue to do so throughout 2018. Of particular note is the fact that the dollar has not seen much of a bounce even as the geopolitical landscape becomes increasingly unstable. This could be indicative of an investor preference towards hard assets like gold in lieu of dollars.
To put it simply, recent price action in gold may be a dollar trade and not a fear trade.
The trading week ahead will bring some important pieces of data as well as some commentary from Fed officials. The Fed’s Beige Book due for release on Wednesday as well as Leading Indicators to be released on Thursday could be focal points for investors this week.
The Fed has recently reiterated its plans for further rate hikes in the months ahead, and any surprises from the Fed have the potential to be market moving. Despite its plans for further hikes this year, however, the dollar could still continue to lose ground as other global central banks take a more aggressive approach towards normalizing monetary policy.
The gold market could potentially find itself in a bullish position either way. If the Fed raises rates as planned, or even becomes more aggressive with a larger or fourth rate hike, stock investors may become weary and begin exiting the market in larger numbers. As risk aversion increases, investors may seek out alternatives.
The central bank could, however, also elect to keep its foot on the gas and refrain from additional hikes at this time. St. Louis Fed President James Bullard was quoted recently in an article from marketwatch.com, and questioned the need for further hikes at this time. According to the article, Bullard referred to the current level of rates as being “quite close to neutral right now,” meaning that rates are neither fueling nor dampening inflationary pressures. Mr. Bullard also reportedly questioned the need to implement rate hikes in order to counter temporary fiscal stimuli such as the recent tax cuts or spending bill passed by Congress.
Bullard’s opinion appears to be in stark contrast to that of some other Fed officials, who have voiced a far more hawkish view. Either way, there appears to be some considerable disagreement between the policy hawks and doves that could fuel market uncertainty.
Not only would a lack of action from the Fed send mixed signals to the markets, but it could also have a huge impact on the dollar which may already be on very thin ice.