The gold market is off to a strong start as the new trading week gets underway. The yellow metal is modestly higher in early morning trade, with spot prices climbing back above the key $1800 level to sit at $1807 and change. The question many investors may now have is whether the metal will be able to sustain these gains throughout the session and actually close above this level. If so, it could potentially prove to be a major turning point for the market and could lead to further buying tomorrow and throughout the rest of the week.
The gold market is higher today as investors continue to fear inflation. The inflation genie has apparently been let out of the bottle, and many now believe that the current bout of inflation will not be transitory as the Federal Reserve has suggested several times.
Stocks have continued to climb from their October lows as the wave of corporate earnings has largely been solid. This is a big week for corporate earnings reports, and those reports could send stocks to new all-time highs or fuel a significant pullback from recent levels. If recent trends continue, however, the earnings released this week may be great and could ignite a sense of bullish optimism for stock investors that could potentially weigh on the gold market. Despite whatever stocks do or do not do, gold may also remain a center of focus for investors who are concerned about the future prospects of inflation.
Despite what the Fed and its officials have said time and time again, the idea of inflation simply being “transitory” in nature appears to be increasingly unlikely. The massive shipping and supply bottlenecks, seen all over the globe, are proof that these issues may take time, and a significant amount of time at that, to be resolved. If the current state of inflation remains longer than anticipated, it could spell real trouble not only for consumers but for central banks as well.
The Federal Reserve, for example, could be forced to begin hiking interest rates sooner than it has planned in order to combat rising price pressures. These rate hikes may help quall inflation, but also come at a cost. Higher rates could cripple the economic recovery and could even send the economy back into a full-blown recession. The slightest misstep by the Fed could have dramatic and long-lasting consequences that could affect the lives of consumers, businesses and the government for many years to come. The Fed could, however, elect to ignore the threat of inflation as it appears to be doing now, and could maintain ultra-low rates with or without monthly asset purchases or QE.
The many unknowns surrounding inflation and central banks could keep a strong bid going in gold for the time being. With so many reasons outside of inflation to buy and hold physical gold, it seems now may be the ideal time to build an allocation or add to existing holdings.