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The gold bears have gained some momentum this week. The bulls have held the bears from doing even more damage, however, in what may be viewed as a market positive. The bears took the price of gold below the $1700 level Friday before the bulls jumped in and took prices back above this key level. The $1700 level may become a large tug of war in the days and weeks ahead. Whoever can establish dominance in this area may see prices go their way in the weeks ahead.

The gold market has been hit recently by a barrage of negative items. Inflation remains at a 40-year high. Because of this, the Fed is likely to hike rates again this month by 75 if not 100-basis points. The notion of an aggressive Fed and higher interest rates has sparked a rally in the dollar, which now sits around a 20-year high. Yields have also gotten a lift recently, with the benchmark 10-Year Note now yielding over 3% again.

The dollar strength and higher yields have had a severe impact on gold, and may keep any upside limited for now. If the dollar were to stage a reversal at some point, however, the gold bulls could take advantage and pounce on lower prices.

While inflation remains a point of market concern, commodity markets have been providing some signals that perhaps inflation has peaked. Declines in crude oil, cotton, copper and more may all point to easing price pressures in the months ahead. Not only that, but these easing commodity markets may also be signaling that a recession has already arrived or is very close. Should the economy enter recession, the Fed could elect to take a pause from its rate hikes or to even reverse course. If this happens, gold could benefit handsomely as it could drive the dollar and yields lower.

Whatever it may prove to be, the gold bulls do need some fresh, bullish catalyst to take prices higher. The bulls have been lacking any significant bullish news for several weeks now. During that time, the bears have taken and maintained momentum as prices declined from well over the $1800 level to near the $1700 level. Although the market may now be oversold, there is not much to hold it up except the willingness of bargain hunters to jump in and buy around current price levels.

The bulls have significant work to be done in order to get prices moving higher on a sustainable trajectory. The bulls must first produce a close above the $1800 level to negate some of the recent bearishness. A close above $1900 would be even better, as it could attract a wave of fresh longs into the market and possibly send it back towards all-time highs. For the time being, however, the bulls will need to try to avoid a close below $1700. A close below this level could set the stage for more downside and a longer road higher again for the bulls.