The gold market is higher Tuesday as the bulls step in and buy the dip. The day’s gains are keeping the recent uptrend alive and have pushed spot prices back to resistance at the $1850 level. Stock market weakness and crude oil strength may also be playing a role in gold’s upside today as bargain hunters pounce after recent price weakness. Not much has changed in the gold market in recent weeks, and the period of price consolidation could be nearing an end.
Inflation remains a major market influence and one that will likely continue to affect gold for months or years to come. Treasury Secretary Janet Yellen will be grilled by lawmakers today and Wednesday concerning the Biden Administration’s budget plans as well as how it plans to deal with rampant inflation. Yellen will likely discuss more of the same, suggesting that rate hikes may take care of inflation without slowing the economy down too much. Should Ms. Yellen express different concerns or a varying point of view from other officials, it could upset investors and produce a new wave of uncertainty within markets that could heighten volatility and increase selling in risk assets.
The Federal Reserve has already said it would use all of the tools at its disposal to combat inflation. Whether the central bank actually follows through with this plan is another source of concern for markets. The Fed is not known for always doing what it says it intends to do, and the pressure on the central bank is likely to mount considerably as stocks and risk assets sink further on higher interest rates. The true test of the Fed’s mettle likely won’t be seen for a few months, until it has had the chance to raise rates significantly higher from current levels. The risk of the Fed pausing or reversing course must be considered, as it could lead to an extended period of stagflation.
More inflation data is due for release later in the week. The European Central Bank is meeting Thursday and will likely lay out its plans for tighter policy in the months ahead. The U.S. Consumer Price Index is set for release on Friday. CPI is expected to show a rise of 8.2%, following April’s rise of 8.3%. A stronger-than-expected reading could send markets into a tailspin while a weaker-than-expected figure could provide some needed relief.
The gold market remains in no man’s land currently although the bulls are now showing some signs of life again. Spot gold is currently at $1850 on the nose. A breakout above this level in the days ahead could signal a rally, and prices could rapidly be lifted to attempt a breakout above the $1900 level. A failure near current levels, however, could have the opposite effect and could see prices decline significantly, possibly testing the $1800 level in short order. A breakout above $1900 or a breakdown below $1800 could dictate gold’s movement for the months ahead.