The gold market is seeing some moderate selling pressure today as investors prepare for the weekend. The gold bulls may, however, be simply gearing up for a strong run towards resistance in the $1840 to $1850 area. An upside breach of this area on a closing basis could set the stage for a rapid run higher that could potentially take the yellow metal back to all–time highs or beyond.
Despite worries over the Fed and its decisions regarding monetary policy, the gold market has several key issues working in its favor currently that could drive the metal to new all-time highs. These issues include persistent, rising inflation, a leveling off of the dollar and strong crude oil prices. The threat of persistent inflation is so great that numerous analysts believe the Fed will be forced to raise rates more than the three times it has already penciled in for the year. The Fed has already said it will taper its monthly security purchases at a faster rate to bring its QE to a close, and many now expect the first of several rate hikes to come in March.
Although many are under the false belief that a tightening of monetary ;policy is bearish for gold, the metal is likely to move higher as the Fed takes action. Previous tightening cycles have seen the value of gold rise and there is no reason to believe this time around will be any different. With the Fed having seemingly boxed itself into a corner, the gold market could gain a lot of ground in the months ahead if the central bank remains well behind the inflationary curve.
The demand for inflation hedging assets is likely to mount further in the months ahead. Cryptocurrencies, such as Bitcoin, were clobbered yesterday and may see sideways to lower price action for the foreseeable future. The lack of a competitive asset class may give the gold bulls more ammunition. AS inflationary pressures remain or strengthen further, an increasing number of investors are likely to seek out assets they believe may protect their wealth and preserve their purchasing power. Gold will likely be at the top of the list and could see a rapid and sustained run higher on such buying should it develop.
The next few weeks should be very telling for the gold market. The metal will either breakout higher or the bears will have enough power to stop its recent upside. An upside breakout is likely to attract more buyers and add strength to the market. An upside failure, on the other hand, could be devastating for gold as many of the bulls could possibly throw in the towel, creating a large sell-off in the process. While this scenario seems very unlikely, it must be considered. For the time being, however, the bulls will look to conquer resistance just $15 to $20 higher from current price levels. The bears will look for a decline and attempt to take process below the $1800 level and then the $1775 region.