Gold is up, having reached a 6-wwek high of 1299.30 in earlier U.S. trading. While gains stalled just shy of $1300, the bias remains to the upside and further challenges of this critical level seem likely.
Gold us being helped by recent weakness in the dollar. The dollar index fell through important support at 92.80 (12-Oct low) to establish fresh 9-week lows. More than 61.8% of the bounce off the September low at 91.13 has now been retraced, making that level a logical target. The DX is now well below the 20-, 50-, 100- and 200-day moving averages, lending credence to the bearish scenario.
Dollar losses gained momentum last week after the FOMC minutes from the November meeting came in more dovish than expected. There also seemed to be heightened concerns about asset valuations.
In that respect, the Fed has sort of painted themselves into a corner: The stock market seems to like everything the Fed does these days. Tighter policy and the implications of an improving economy have lifted stocks, while a more dovish Fed (September pause) has also buoyed stock because it means cheap liquidity.
At this point, the market still believes a December rate hike remains baked in the cake. At this point, if the Fed wanted to prick the stock market bubble they would likely have to turn much more hawkish than the market is presently expecting and I think they are disinclined to do so.
With the über-accommodative policy stance over the past decade, the Fed is very much responsible for pushing investors out along the risk curve. Pensions should be of particular concern, because if stocks seriously correct, the already underfunded situation of many public pensions is only going to get worse.
Stocks however will ultimately correct, perhaps as a result of a central bank miss-queue, but more likely due to some external factor outside the control of the central banks. When the next crisis comes, financial writer and publisher John Mauldin believes “central banks and governments will react in ways that are even more unthinkable” than the measures they employed during the financial crisis.
At that time, as the world’s central banks pumped liquidity into the financial system, gold soared to record highs. I suspect the results the next time will be the same.