Gold is extending to the upside, establishing new 5-week highs above yesterday’s high at 1270.45. The yellow metal is being underpinned by a myriad of fundamentals that are stimulating safe-haven interest, as well as a weaker dollar.
The dollar index has given back nearly all of its recent gains, leaving last week’s low at 96.80 vulnerable to a retest. In the bigger picture, the greenback has retraced all of its post-election gains that were attributed to hopes that the new President would enact substantial reforms to stimulate the sluggish U.S. economy.
As the President became mired in setbacks and investigations, his agenda stalled and markets seemed to lose faith that any meaningful legislation could get pushed through. The exception of course is the stock market, which remains well bid, although there remains some concerns about the breadth of that rally. The dollar index has fallen 6.6% from its January highs.
The dollar has been gradually losing its stature as the global reserve currency. Fitch has warned that two pieces of draft legislation – the Federal Reserve Transparency Act and the Financial Choice Act – threaten to undermine Fed independence and hurry the dollar along the path to its replacement.
Let’s be honest here: The Fed is already engaged in indirect funding of the government, as evidenced by its $4.4 trillion balance sheet, chock-full of Treasuries. I’m no huge fan of the Fed, but the thought of politicians having greater sway over monetary policy makes me shutter.
In Congress’s failure to act during the financial crisis, it forced the Fed to make some rather dangerous decisions that have led to even more debt and asset price frothiness. Why would anyone think that our partisan legislative bodies, could effectively manage the monetary and financial systems?