The gold market is lower this morning after hitting a three-week low in recent action. The dollar is pushing higher once again, hitting a five-week high overnight and now back near 20-year highs. The stronger dollar, along with some risk aversion today, are both weighing heavily on gold in early morning action.
The Federal Reserve and its plans for interest rates remain the focal point of investor attention. The Fed is seemingly determined to get inflation under control, and in doing so could very easily put the U.S. economy into recession. Having said it believes inflation to be the worst risk for the economy, the Fed may very well hike rates aggressively again next month.
In the meantime, the markets will await anything new from the Fed symposium taking place this week in Jackson Hole, Wyoming. Fed Chairman Jerome Powell is set to release a speech on Friday morning, and previous symposiums have produced some worthwhile policy statements by the Fed. Any clues provided by the Fed concerning policy may be market-moving. If the Fed signals it will stick to its aggressive plans for rates, stocks and risk assets could sink sharply. If the Fed strikes a more dovish tone, however, it could potentially pave the way for stocks to push higher along with gold.
The Fed and its aggressive rate plans have been a major obstacle to higher gold in recent months. The dollar has also been a major factor, as it is today, as the currency has risen to 20-year highs. The dollar is likely only seeing benefit from the notion of sharply higher interest rates, however, and its upside may become very vulnerable to a significant pullback if things change. Should the dollar begin to show signs of weakness, gold could potentially start to take off to the upside.
The potentially aggressive Fed, a stronger dollar and bearish technicals are not the only factors affecting gold currently. The ongoing war in Ukraine, the potential for war in Taiwan and other geopolitical factors are all playing a role in market action right now. If China elected to invade Taiwan, for example, the U.S. and the west may see no alternative but to get involved. Should that prove to be the case, the world could see its Third World War very quickly. Under such a scenario, gold could potentially move higher or lower depending on the reaction of the investment world. Certainly, a number of unknowns would be presented to markets that could keep investors shying away from stocks and other risk assets. This could, in turn, fuel a strong and sustainable bid in gold.
For the time being, the war between bulls and bears has some seemingly clear boundaries. The bulls are looking for a close above $1800 while the bears need a close below $1700. Whichever is seen first could dictate market action for months to come and could lay the groundwork for a sustainable run in the yellow metal.