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. 

Gold is often bought during times of uncertainty, and right now it would seem that investors are feeling more and more uncertain about numerous issues.

 

Tension levels between the U.S. and North Korea have reached new heights. In an almost tit for tat exchange, leaders from both nations have traded threats. The risks of a nuclear confrontation appear to be at the highest levels since the Cold War, and both militaries are on alert.

 

It remains unclear if North Korea actually has the capability to deliver a nuclear warhead to North America, but recent assessments by U.S. intelligence agencies would seemingly indicate that North Korea has-or is very close to having-such capability.

 

Guam has been at the center of attention in recent days as North Korea has threatened to strike the island. Guam is of strategic importance to the U.S. as it is home to thousands of American soldiers as well as an Air Force bomber group.

 

President Donald Trump has vowed to hit North Korea if it attacks Guam or other U.S. interests, and although a first strike by the United States seems very unlikely, it cannot be ruled out. The situation has, however, gotten a bit stickier as China voiced its position. The country has said that it will remain neutral if the U.S. is attacked by North Korea, but will protect North Korea if the U.S. attacks or attempts to remove the current regime.

 

The threat of war with North Korea is more than enough to keep investors on their toes. Add to this threat the ongoing investigation of possible collusion with Russia by the Trump campaign and the possibility of U.S. military action in Venezuela and you have a recipe for significant risk aversion.

 

The flight to safety has not been seen in force yet, but unless things cool down dramatically it could simply be a matter of time before investors shun risk assets en masse. Stock investors have remained surprisingly resilient in recent weeks, but that resilience is likely approaching its limits.

 

Gold has been trending higher for several weeks now, and is close to breaking out above its most recent highs. An upside breakout in the yellow metal could draw further buying interest, and the market could really be off to the races if the current geopolitical landscape does not change quickly.

 

The U.S. is still also facing numerous domestic issues that could potentially keep gold and other perceived safe haven assets moving higher. Violence in Virginia over the weekend at a protest is another sign of the divisions being faced within the country. The lack of major tax or fiscal spending legislation may also eat away at investors’ appetite for risk.

 

The ongoing lack of inflationary pressures may also keep the Federal Reserve from becoming more aggressive in monetary policy, and the bull market in stocks may be reaching its crescendo after almost a decade of gains.

 

Any way you slice it, it appears that the gold market is beginning what could prove to be a multi-year protracted bull market as stocks may be in the process of making a long-term top. Heightened geopolitical tensions may accelerate a significant move higher in gold, with the possibility of a substantial spike higher in price should military conflict become unavoidable.

 

Hopefully, diplomacy will be the primary tool used to reach a peaceful resolution.