Gold, the Dollar and the 'Fire and Fury'

 | Aug 09, 2017 | 2:00 PM EDT
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As the dog days of August continue and the summer begins to wind down, the gold market is clearly trapped between a rock and a hard place. With gold priced just below $1,280 per ounce, the yellow metal has enjoyed a nice bounce although it remains locked in the trading range it has occupied since late spring.

Price action recently versus the dollar has largely reflected the safe-haven qualities most often cited when talking gold valuation. The recent bellicose statements from President Trump concerning North Korea seem to be the reason behind the current 1.25% move higher.

The drop in the U.S. unemployment rate and the subsequent boost to the dollar late last week and early this week began to slightly erode some gains gold had made over previous weeks. But gold strength returned late yesterday as President Trump issued his remarks concerning the ongoing dispute with North Korea. These events highlight the current market drivers of gold very well.

In the first instance, the gold price is reflective of dollar strength or weakness. If the U.S. economy is really doing better and the Fed is correct, the dollar weakness that we have seen for many months should end and the price of gold will fall as the dollar strengthens. On the other hand, if the economy is not as robust as believed the reverse could occur and dollar weakness will translate to a higher gold price. Inflation data due later this week should help us get a handle on the direction we are going in.

The safe-haven qualities of gold are also demonstrated very often on the geopolitical front. President Trump's remarks about North Korea highlighted this as the precious metal priced bounced late in the day. Geopolitical stresses have often been a catalyst for higher gold prices.

We should note that the price gains made through events like this last about as long as the threat itself. As the collective worry fades so does the price gain related to those worries.

The long-term trend in gold remains solidly bullish. Inflation data later this week will be of primary concern, as it will be immediately reflected in dollar strength or weakness. The gold price will take its cue from that. The real drivers will come in the fall as state and municipal debt problems, the national debt ceiling and tax reform will all be center stage.

When and how these concerns are addressed will determine the length and breadth of the bull market we are currently trending water in. In the words of the president, the "fire and fury" could be coming to the markets in the fall.

Now looks like an excellent time to put away a little safe-haven security before the price goes higher.

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