Gold is starting the week off on a strong note, as the heated rhetoric between U.S. President Donald Trump and North Korean leader Kim Jong-Un has reached a new level. North Korea’s foreign minister stated on Monday that the U.S. has declared war on North Korea, and that the north reserves the right to take countermeasures, including attacking U.S. bombers not in North Korean airspace.

 

Foreign Minister Ri Yong was reportedly quoted as saying “The whole world should clearly remember it was the U.S. who first declared war on our country.”

 

The further escalation in tensions between the U.S., its allies and North Korea has reached a level at which a misstep by either side could bring with it disastrous consequences. It seems that the threat of a nuclear conflict has not been this high since the darkest days of The Cold War, and as of right now there does not appear to be a solution forthcoming.

 

Although current sanctions against North Korea may be causing some economic distress, the country’s leadership appears intent on standing their ground. Although hope remains for a peaceful solution, the idea of some type of armed conflict seems to be more and more likely.

 

Markets do appear to be taking the threat from North Korea more seriously, as stocks are lower while treasury yields are sinking. Although appetite for risk may be waning, investors are not yet in panic mode. That could change quickly, however, with provocative actions by either side.

 

In addition to geopolitics, investors will also be watching the data stream closely following last week’s FOMC meeting. As expected, the Fed elected to hold rates steady for now and reiterated the likelihood of another hike later this year. The central bank also reaffirmed its forecast for three further hikes next year. There are skeptics, however, as inflation remains stubbornly low and no major tax or fiscal spending legislation has been passed as of yet.

 

Gold investors are either not overly concerned about slightly higher rates, or perhaps doubt rates are going anywhere of significance any time soon. The possibility of a topping process in stocks is also likely playing a role in gold’s recent upside, and a major crash or reversal in stocks could send a significant amount of investment capital into the yellow metal and other hard assets.

 

A long-term bull market in gold could be getting underway just as stocks really run out of gas. Stocks have arguably become extremely overvalued, with some analysts suggesting that the bottom could be ready to fall out almost any day now. The gold market has cleared some key technical hurdles and buyers have jumped in on recent dips in price. If stocks begin to falter, or if the geopolitical landscape deteriorates further, the market could potentially make a quick run at the $1400 level. As we have discussed previously, however, slow and steady wins the race in the long run, and recent price action in gold could be considered very constructive for further gains in the coming weeks and months. 

Gold is seeing some selling pressure in early action Monday to begin the new trading week. A stronger dollar, quiet North Korea and weakening of Hurricane Irma are all likely fueling some increased appetite for risk as the new trading week gets under way.

 

For gold, a nice pullback with some back and fill trade may be a very good thing. Markets seldom move straight up or straight down, and when they do make such parabolic moves they rarely prove to be sustainable. Although gold may be taking a breather, the market remains firmly in “buy the dips” mode unless proven otherwise.

 

At this point, it seems it would take a lot to stand in the way of higher gold. A weaker dollar, geopolitics, government gridlock and a dovish Fed may all be playing a role in gold’s recent rise, and may continue to do so. Although the dollar may be seeing a bounce to start the week, the greenback remains in a firm downtrend that has the potential to see prices go lower, much lower.

 

The dollar would seem to be on very tedious ground here as fresh lows could trigger a much larger-scale sell-off. Looking at the bigger picture, there are not too many reasons to be bullish on the dollar right now. Yes, the Fed could potentially decide to raise rates again before the end of the year, and yes, the Fed may maintain the stance that further hikes will be coming. The pace and timing of additional hikes, however, is likely to remain extremely slow. In fact, if markets do start to get into trouble, you have to wonder if the Fed will not only avoid raising rates further but whether they could decide to start lowering rates again.

 

The dollar has seen quite a wild ride since Trump won the U.S. Presidency. After rallying hard, the dollar has been trending lower for some time now, moving below pre-election levels. This is likely due to not only a dovish Fed but also a lack of major legislation being passed (at least thus far). Hopes for major tax reforms and a massive fiscal spending package have dwindled, and unless significant progress is seen, the greenback could remain on the defensive.

 

This week, investors will get the latest inflation data in both CPI and PPI as well as retail sales and manufacturing data. While none of these reports are likely to have a significant impact on markets, slow inflation readings could potentially give the Fed more to think about regarding its rate hike plans.

 

The stock market will also likely be watched closely this week by investors as it is approaching its previous highs. Fresh all-time highs in stocks could potentially weigh on the gold market, while a failure near current levels in equities could also add fuel to the fire being seen in gold prices recently.

 

Gold is due for a pullback, and that pullback should be welcomed. Some back and fill price action will help gold make a more sustainable run higher, and any dips in the market are likely to be aggressively bought at this point.