The gold market was higher on Monday as a slumping dollar took its toll. The currency posted a two-week low today, not long after posting a 20-year high last week. A decline in treasury yields today also played a role in gold’s upside today. Stocks were quite strong today, with markets showing little signs of a typical September.
Downtrends within equity markets have stalled out recently as investors are not currently showing any major signs of anxiety. The lack of anxiety could keep equity markets moving higher while weighing on gold as safe haven demand dries up. Of course, market action could change tomorrow, and change drastically. The latest inflation data will be seen tomorrow morning upon the release of the Consumer Price Index for August.
Following a July reading of a rise of 8.5%, the CPI reading for August is expected to show a rise of 8%. If the figures come in greater than 8%, markets could see some trouble. If the data
comes in below expectations, however, markets could become celebratory quickly and rally. A reading of less than 8% would give credibility to the notion that inflation has already peaked. This could keep the Fed from raising rates aggressively for the rest of the year, and could possibly even give the central bank reason to consider reversing course and easing policy.
A lessening of inflationary pressures could send markets moving in several different ways. The Fed and the implications for monetary policy are the biggest potential shifts that could be seen. Less inflation means less reason for the Fed to continue tightening. Without the inflation problem, the Fed could very well prefer to keep rates lower to boost the economy. If the Fed were to take an increasingly dovish tone and posture, it would likely deflate the rally that has been seen in the dollar for months now. If the dollar began to decline significantly, it could be a major catalyst for higher gold.
While the dollar has been a major roadblock to higher gold, so too have treasury yields. U.S. treasuries have had little reason to move lower, however, except for the notion of higher interest rates to come. If that idea is removed, however, yields could possibly take a bit of a tumble. As yields decline, gold could see renewed buying enter the market as the so-called “opportunity” cost would be less and less.
We expect a significant move for gold in the weeks ahead. Until that move materializes, however, the market could remain range-bound between $1700 and $1800 per ounce as it has for weeks now. Once the bulls or the bears are able to push prices out of the range, on a closing basis, the market could be gearing up for a more sustainable trajectory in the chosen direction. Given the long-term bullish narrative, we expect that direction to be higher. If not, we expect gold would be gobbled up aggressively on any more dips in price and that it would not be long before a major reversal is seen.