Following some recent inflation data, markets appear to be concerned the Fed will not only hike rates aggressively again this month, but will continue to do so in the months ahead. The idea of aggressive rate hikes by the central bank has put a dent into the gold market, and as of this writing the bears have succeeded in taking spot prices below the key $1700 level. The growing fear that the Fed could actually hike by a full 100 points next week is increasing and could keep gold under pressure until that time.
According to the CME FedWatch tool markets are now pricing in a greater than 30% chance the Fed will hike rates by a full point next week. The debate over whether the Fed would hike by 50 or 75 points appears to be over, and expectations have now shifted to a more hawkish posture.
The Fed does seem intent on bringing inflation down to manageable levels. The central bank has said repeatedly that it feels inflation is the greatest risk to the economy. Seemingly unafraid of a recession or other issues that could be caused by aggressive hiking, there is little reason to believe right now that the Fed could change its tune anytime soon. Should the Fed remain on course and continue hiking rates aggressively, it may only be a matter of time before the economy really stops.
Investors have been using the term recession quite a bit in recent months when referring to the Fed. While the central bank may not have yet put the country into a recession, one is likely coming if not here already. That means market volatility and selling could see a dramatic pickup in the months ahead. Stocks have come roaring back in recent m months from the initial plunge. The second wave of selling could, however, see stocks put in a fresh low and a bear market. Whether this would drive investors into gold remains unclear.
The Fed may be the determining factor for gold in the months ahead. If the Fed remains stubbornly hawkish, gold and other asset classes could sink as investors fret over recession worries. If the Fed decides to take a pause or reverse course, however, gold could potentially rocket higher as investors may see a dovish Fed as simply returning to the norm. The Fed will have to provide more clues about its intentions in the months ahead regardless of how much it hikes.
With the market now below the $1700 level, the bears are in firmer control and could look to take prices on a fresh and significant leg lower. The bulls will need to defend support in the $1675-$1680 area. If that level is taken out, it could trigger numerous sell-stops and send prices rapidly lower. There would be little, in fact, to halt a decline before the metal reached the $1550 level. A breakdown below that support could also signal an end to gold’s multi-year bull market.