Blog

The gold market is lower again Monday as numerous issues weigh on the metal. A stronger dollar was a large factor in today’s price action as speculative positioning is now close to neutral. Bearish bets on gold have increased recently as hedge funds have dropped the metal, and long specs have seen a dramatic decline that has taken the number of longs in the marketplace to the lowest level in three years. Having become what some might consider overly bearish in recent weeks, the gold market could be ripe for a turnaround as capitulation could be seen soon.

Markets are awaiting what will likely be the key data point of the week in Wednesday’s Consumer Price Index, or CPI. The data is expected to be hot, showing a year-over-year rise of 8.5% for the month of June. This would follow the hot reading for May, which showed a rise of 8.6%. The inflation reading for June could potentially be market-moving. A hotter than expected figure could send investors running for the exits in masse. A miss on the data, however, could fuel a substantial tally for stocks and risk assets as it could point to inflation having already peaked. This could alleviate some of the fears over a Fed-induced recession coming this year and could send risk assets sharply higher.

Markets are also eagerly awaiting the July FOMC meeting later this month. It is widely expected that the Fed will again raise rates by 75-basis points in an attempt to get a handle on inflation. It is far more unclear, however, what the Fed may do in the coming months. While the central bank could continue to raise rates by 75-points or even more at a crack, it may be more likely for the Fed to take a more moderate approach and raise rates by 25 or 50-points at a time. Whatever the Fed decides to do, or not do, it could have significant effects for global markets.

Some analysts have suggested that gold has held up well, given the environment and the dollar at 20-year highs. Other analysts, however, feel that further downside cannot be ruled out and may even be likely. The bears will need to produce a close below the $1700 level to attract fresh shorts. The bulls, on the other hand, need to push prices back above the $1800 level to even get started. The $1900 area may be even more important. A close above this level could attract a fresh wave of buying that could put gold on a sustainable track higher.

Gold could be getting ready for a reversal as many other commodities prepare for some mean-reversion. Gold has stood around its 100-week average for the last year or so as other commodity markets have taken off and become arguably stretched. That overbought condition may soon work itself out and could send many commodities lower. Gold could, at the same time, embark on a significant reversal and possibly even embark on a fresh run higher.