Gold has returned to a short-term defensive posture going into the weekend, seemingly ignoring the latest North Korean provocation and a softer dollar. However, these two items should in fact limit the downside in the yellow metal.
North Korea launched another missile early on Friday that overflew Japan. The recent missile launches, along with the nuclear test and bellicose rhetoric has heightening calls for the re-militarization of Japan. South Korea responded to the DPKR missile launch by test firing missiles of its own.
The UN passed increased sanctions on North Korea earlier in the week. The Security Council is meeting again today. U.S. ambassador to the UN Nikki Haley said she has “no problem kicking [the North Korean issue] to General Mattis because I think he has plenty of options.” General James Mattis is the U.S. Secretary of Defense and Haley’s statement may reflect a belief that more direct action may be warranted, rather than more talk and more sanctions.
The dollar index has retraced more than 61.8% of this week’s corrective rally, returning focus to the downtrend. If the dollar is destine to trend lower, beyond the multi-year low set last Friday, it should have a bullish impact on gold.
Today’s round of weak economic data adds to the expectations that the Fed will hold steady on policy next week. Whether or not the Fed will announce details on balance sheet normalization at the end of this FOMC meeting remains to be seen. Prospects for a December rate hike remain a coin-toss.