Gold rebounded smartly back above the $1300 level in early New York trading, after North Korea accused the U.S. of declaring war on them. The yen and bonds rose and stocks fell as investors rotated back to a risk-off footing.
“Since the United States declared war on our country, we will have every right to make countermeasures, including the right to shoot down United States strategic bombers even when they are not inside the airspace border of our country,” said DPRK Foreign Minister Ri Yong Ho. So while the situation was deemed to have calmed over the weekend, it seems such periods are destined to be short-lived.
Gold had been defensive since last week’s Fed policy decision lifted prospects for one more rate hike before year end. With inflation still tepid and Q3 GDP expectations ratcheting lower, I continue to have my doubts.
If we are to believe the Fed paused in September, mainly as a result of weak inflation, it seems unlikely that things will change materially over the next 3-months.
Higher prices for gasoline and some other items in the aftermath of the hurricanes will likely boost inflation temporarily; apart from that effect, inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. — FOMC Statement
Additionally, the Fed projects GDP to remain soft near 2% through 2020. The central bank’s longer-run growth projection remains 1.8%. The Fed tends to be overly-optimistic on both growth and inflation, so their current projections just don’t seem to warrant tighter policy.
Somehow the Fed is clinging to their credibility, but I suspect gold and the dollar have overreacted to the perceived hawkishness implicit in the announcement of balance sheet normalization and the dots that suggest that the members of the FOMC see rates continuing to ratchet higher.