As the new trading week gets underway, the gold bulls are seeing some further bullish momentum. Spot gold prices are up $12.80 per ounce today as equity markets see some afternoon buying. Inflation worries appear to be the primary driver of market action today. With corporate earnings generally being quite strong, investors today are continuing to digest last week’s non-farm payrolls data which was stronger than expected. The better than anticipated jobs data may act as a green light for the Fed to begin hiking interest rates next month and could pave the way for a series of hikes this year.
The Fed raising rates in just a few weeks time has markets worried but not overly so, at least thus far. While the Fed has already penciled in three interest rate hikes for 2022, many analysts believe the central bank will be forced to hike rates at least four times, possibly even more. Of course, the pace of any Fed rate hikes will likely largely depend on inflation and whether price pressures abate at all in the weeks and months ahead. Recent data would seemingly suggest, however, that price pressures may continue to rise and run rampant. The Fed seemingly has realized it is well behind the inflation curve already, and the central bank may act far more aggressively, therefore, than previously thought.
An increasingly aggressive Fed is not necessarily a bad thing for gold. The gold market has risen through previous rate hiking cycles and there is no reason to believe that this time around will be any different. The Fed tightening could affect stocks and risk assets, however, and may lead to a long period of heightened volatility and major stock sell-offs. A full-blown trend reversal is also a strong possibility. As equity markets come under increasing pressure, much of that capital could find its way into the gold market as investors seek out alternative places to put money to work. Such a scenario could, in turn, act as a major catalyst for higher gold prices, possibly even driving the metal into fresh all-time high territory.
In addition to the threat posed by inflation and the Fed, markets will also continue to monitor the crude oil market, the dollar and other geopolitical issues. Although it is trading lower today, crude oil prices are now firmly in the 90s and many feel that $100 per barrel oil will be seen soon. While stronger crude may be partly due to the inflationary environment, it is also the “leader” of
the commodity sector. Higher oil may, therefore, drag other commodities higher as well along with it. This could feed into the current inflation narrative and force investors to seek out asset classes that may provide protection and preserve purchasing power. It is difficult to imagine such a scenario in which the value of gold does not increase and increase substantially.
In the meantime, the bulls will look for a close above the January highs in the mid- $1850s while the bears will target a decline to the January lows around $1780.