Dollar Strength

Dollar Taking Charge

The gold market is kicking off this new trading week on a weaker tone. Spot prices have declined below the $1,750 level in late morning action Monday as the bears look to exert control. The dollar has been a major bearish factor for gold today as it hit a five-week high and is back near 20-year highs.

Dollar Strength

Dollar strength has been a major obstacle to higher gold for months now. The currency has likely seen significant benefits from the Federal Reserve and the notion it will remain aggressive toward monetary policy. The Fed has raised rates more aggressively than previously estimated thus far, and could continue to do so when it next meets in September.

Following the last FOMC meeting at the end of July, some analysts believed that Chairman Jerome Powell was planting the seed for the Fed to pivot away from the inflation fight. The markets do not like higher rates, and as the Fed hikes aggressively, the chances of a recession rise.

Will The Fed Avoid Recession?

Some feel the Fed will want to avoid a recession at all costs. Others think the Fed will remain aggressive and continue hiking rates to calm price pressures that remain near 40-year highs. Having already stated previously that it believes inflation to be the worst risk to the economy, the Fed is likely to continue on its current path.

If the Fed does keep taking rates higher, pressure is likely to build on it to take a pause or even reverse course. This pressure may not just come from the public, either, but could come from politicians and government officials as well. As pressure mounts on the Fed, it could become increasingly difficult to stay on its current course of higher rates and balance sheet shrinkage.

                                                                          Source: cmegroup.com

The Fed is certainly a big deal for markets and will remain to be such in the months ahead. The Fed is not the only factor affecting markets, however. In addition to the path of monetary policy, markets must also grapple with numerous geopolitical issues. The war in Ukraine, for one, and the threat of war in Taiwan, for another.

Geopolitical Risks

As the geopolitical risks mount upon markets, the Fed could be forced to view things differently. A Chinese invasion of Taiwan, for example, could leave the U.S. and west with no choice but to get involved. This could in turn be the beginning of World War III, and markets would likely not like what they see. This could, in turn, only add to economic risks and heighten the likelihood of a recession.

For the time being, gold remains stuck in neutral territory. The market has been unable to produce a close above the $1,800 level or below the $1,700 level. Until it does, the yellow metal could remain mostly sideways with little volatility. Once one of these levels is pierced on a closing basis, however, volatility could expand as the market begins to make a sustainable move in that direction.

Long-Term Bullish Narrative Remains Intact

Although recent price action may give the bears a slight edge, the long-term narrative for gold remains highly bullish. The U.S. and other nations are still riddled with massive, unpayable debt loads that will have to be dealt with at some point. The U.S. Dollar, as well as other major fiat currencies, will still lose value over time as paper currencies always do. As these currencies become increasingly worthless, the investing public will have no choice but to seek out viable alternatives.

As an investment vehicle that has been used successfully for millennia and with zero counterparty risk, gold may be the best long-term option to act as a reliable store of value and protector of wealth. At some point, likely sooner rather than later, its price will reflect its importance.