Traders and investors will continue to digest any key commentary from last week’s Fed symposium in Jackson Hole, Wyoming. Although much of the commentary was centered on regulatory issues, the dollar index did end Friday’s session on a weak note and could potentially be headed for further downside. This is likely due to the fact that central bankers did not do anything to clarify their intentions further, and Fed Funds contracts are still reportedly only pricing in about a 35% chance of another hike by the Fed this year.
The dollar index has seen quite a reversal in fortune in recent months. The greenback moved higher in the aftermath of the Trump Presidential victory, but has since lost considerable ground, giving back not only all of the post-election gains but moving below pre-election levels.
The weakening dollar has almost certainly had an impact on gold and other hard assets, and further weakness may stoke additional buying interest in metals. The dollar may become an increasingly important theme in financial markets in the coming weeks and months. Doubts about the Trump administration’s ability to implement its agenda have been a major factor behind recent dollar weakness, and a dovish Fed is also not doing the greenback any favors.
The ongoing lack of inflation and doubts about potential infrastructure spending and tax reforms could make the Fed very comfortable leaving well-enough alone for the time being, and rates could stay at or near current levels for a long time to come. This, in turn, could act as a major source of fundamental resistance to any significant rallies in the dollar.
The notion of a weaker dollar, ongoing low rates and the potential for a major stock market reversal are likely more than enough to keep investors buying gold. The current geopolitical landscape is another “wildcard” that may keep a floor under gold prices while also having the potential to fuel a sudden and significant rally in the yellow metal if tensions escalate further.
Speaking of escalation: North Korea launched a trio of missiles over the weekend reportedly in response to military exercises being conducted by the U.S. and South Korean armed forces. Although these missiles were short-range in nature and not the type of ICBM potentially capable of reaching the U.S. mainland, the test itself underscores the efforts being made by Kim Jong Un to advance North Korea’s military capabilities.
Although it is certainly hoped that diplomacy will prevail and provide a non-military solution to the conflict with North Korea, there have thus far not been any real signs that the North has any intentions at all of engaging in a meaningful dialog.
As the final weeks of summer begin to wind down, trading in financial markets could potentially see lower volumes with rising volatility. Equity markets are likely to take center stage, as investors try to decide if the aging bull market has run its course or if the market has more left in the tank.
In the absence of another catalyst, a clear stock market reversal or major sell-off could be the match that lights the fuse to sharply higher gold.