The gold market ended the session and week higher Friday as the bulls retook previous resistance at the $1800 level. Spot prices ended the day up over $23 per ounce at $1815. The strong showing today comes on the heels of this week’s FOMC tapering announcement and could be the beginning of a sustainable run higher.
Despite the Fed’s plans to taper its monthly security purchases, or QE, the central bank does not appear to be in any hurry to raise interest rates. The lack of higher interest rates may provide stock investors reason to continue getting long, but they may also weigh on the dollar and thus potentially provide the gold market with a boost.
It has been discussed for some time now that the Federal Reserve may hold the keys to higher gold. That may in fact be true, but perhaps not in the way that many were thinking. It was thought by many that the central bank’s tapering announcement may give the bears reason to bear their teeth and take the market lower. In fact, however,the opposite seems to be happening. The bulls appeared to be out in full force today, despite the Fed’s Wednesday tapering announcement. This could simply be due to the fear of the unknown now being resolved or the notion that investors may now focus their attention elsewhere. Inflation may now become the center of investor attention, and all signs currently point to rising prices.
The period of inflation currently being seen may not be transitory in nature, as the Fed has suggested. It could be not only the beginning stages of a significant rise in prices, but could even point to an extended period of stagflation down the road. Whether stagflation does in fact come to fruition remains to be seen. A rise in prices has already been seen, however, and investors may become increasingly wary of a further rise. The threat of inflation could not only slow the global economy significantly, but could even put the domestic and global economies into a full-blown recession.
Markets are currently pricing in a rate hike from the Fed by June of next year. Those policy expectations may see a dramatic shift in the year ahead, however, and the Fed will likely want to keep its options open based on economic activity. Fed Chairman Powell, in fact, made clear in Wednesday’s press conference that rate hikes do not need to follow tapering of QE. It seemed to suggest that Powell is in no hurry at all to start tightening policy and that ultra-low interest rates could be here for quite a while still. This may giove gold investors reason to buy throughout the year and could fuel a rise in the price of gold that exceeds or even far exceeds current all-time highs.
Today’s gains have put the bulls back in command on the daily chart. The next major task for the bulls lies in the mid 1830s, however. That level must be breached on a closing basis, in order to provide momentum to any further rally higher.