The gold market was sharply higher on Tuesday as the bulls retook the $1800 level in convincing fashion. Spot gold now stands around the $1818 level and is up over $30 per ounce on the session. Increasing risk aversion as well as a weaker Dollar Index provided the bullish fuel today. Whether that trend continues into the end of the year remains unknown, however, the bulls have taken a major step towards higher prices with the day’s rally. A surprise move by the Bank of Japan also caused some risk aversion today, boosting gold in the process.
The Bank of Japan today did something that caught the markets off-guard. The central bank effectively made a move that tightens its policy by increasing the cap paid for interest on its 10-year bonds by .25%. The move sent the yen flying higher against the dollar while also jolting stock and bond markets. The yen-based “carry trade” that speculators had been putting on for years suddenly became very shaky, and the move likely fueled a good amount of buying in gold today. The bulls are now in firm control of the gold market. The yellow metal has a six-week old uptrend in place on the daily chart and it could take significant work for the bears to break it at this point.
U.S. and other global central banks may play a huge role in gold’s year ahead. The move by Japan today was not even that big, yet had a profound impact on markets all over the globe. As these powerful financial institutions look to sort out theory policies in the year ahead, more bumps and bruises for markets may be likely. With central bank actions done for the year at this point, an increase in volatility may not be seen until they meet again in January. The U.S. Federal Reserve is expected to keep raising interest rates, bringing the terminal rate to over 5% by the time it is through. The Fed will likely keep hiking into early 2023, although those rate hikes may be smaller than the previous 75 point hikes markets had become accustomed to.
If the Fed should, at some point, decide that it has hiked rates enough, gold and stocks could see a sharp and rapid rise higher. The Fed may not even need to signal a reversal and that cuts are coming. A pause in the rate hikes could be enough to fuel a fresh bullish cycle in gold and to give stocks reason to climb higher. Of course, what the Fed does or does not do next year may depend largely on whether the data continues to show inflation easing up. If it does, the Fed may put a halt to its rate hikes quicker than anticipated. If it does not, however, the Fed could elect to keep hiking rates as far as it sees necessary. The first scenario could be very bullish for gold, while the second could give the bears reason to pounce and send the metal sharply lower from recent levels.