The bulls have demonstrated their current control over the yellow metal, purchasing Tuesday’s dip to send prices sharply higher in early action Wednesday. Inflation fears remain the central theme for the bulls. Now that the market has cleared resistance in the mid 1830s, it could potentially be off to the races in the sessions ahead. In fact, the bulls could target previous all-time highs in the weeks ahead. An upside breakout into fresh all-time highs could see the metal run sharply and significantly higher in a short period of time.
Stock markets have remained strong in recent weeks. Upbeat corporate earnings data combined with holiday shopping has stock investors in a good mood. Whether that positivity can be retained into the new year remains a key question, however, as numerous potential hurdles may present themselves. For now, inflation remains the key economic topic that may dictate market direction for the months ahead. Despite previous reassurances from the Fed that inflation appeared to be transitory in nature, rising price pressures do not seem temporary at this point and could continue to put a stranglehold on the economy and consumer for an extended period of time.
The U.S. could, in fact, be entering a prolonged era of stagflation in which prices rise while economic output decays. Although it remains to be seen if this will prove to be the case, the notion may keep investors on their toes for the next several months and could keep interest in hard assets like gold elevated. If the nation does in fact enter stagflation, gold could see a sharp and dramatic rise into new all-time highs. The yellow metal could see such a rise whether the U.S. sees stagflation or not, and any form of rising price pressures is likely to keep the bulls motivated.
Regardless of what the Fed may think, the current state of supply is in dire straits. Massive shipping bottlenecks
will take several months to resolve, at a minimum. As long as these bottlenecks persist, higher prices are not only possible but increasingly likely. The Federal Reserve does have the power to squelch inflation and slow things down, the question though is will it. The Fed already seems to be far behind the inflation curve, and the longer the central bank stands by watching, the worse the problem may get. Having backed itself into a corner, the Fed now finds itself not wanting to upset stock markets by adjusting monetary policy. The central bank appears to be quite willing to allow inflation to spiral out of control as it maintains its current state of ultra-low interest rates and accommodating policy.
This course of action by the Fed may prove to be its folly. It will encourage investors to go to gold, however, as the threat of even higher prices increases. The effects of Fed policy may take years to unwind, if they can even be unwound at this point. This along with other bullish factors could keep gold moving higher for years to come and may keep any dips in the value of gold attractive to patient buyers.