Gold is edging lower, weighed by a firmer dollar and revived risk appetite, which has driven stocks higher. However, a number of factors continue to offer fundamental underpinnings to the market.
While NY Fed President Dudley reiterated today the optimism expressed in last week’s FOMC statement, one has to wonder if the central bank can really continue tightening with the anticipated fiscal stimulus stalled in Congress.
Senate republicans are acknowledging they are not even close to a deal on healthcare reform. “That impasse has held up work on a budget resolution, which is necessary to move tax reform and the annual appropriations bills,” according to The Hill.
GOP policymakers are reportedly considering cancelling the August recess in the hope of breaking the log-jam. However, the staunch political opposition and the ongoing investigations will continue to generate significant headwinds to the so-called reflation trade.
If the President’s agenda is well and truly dead in the water, and the Fed is committed to their tightening agenda, it seems like the stock market in particular is underestimating the risks to growth. “This is the most hideously overvalued market in history,” said David Stockman in an interview last week. Stockman sees potential for a 35% correction in the S&P 500.
Given the risks, it might be prudent to lighten-up on exposure to a grossly overvalued stock market, and reallocate that capital to an undervalued safe-haven. That haven is of course gold.
On top of all that, a U.S. fighter shot down a Syrian MiG yesterday. The Russian Defense Ministry called it a “massive violation of international law” and severely escalated the geopolitical risks in the region by saying they would start viewing U.S.-led coalition jets flying west of the Euphrates River in Syria as “targets.” If a U.S. plane is fired on by Russia or the Syrian military, all heck could break out in a big hurry.