The gold market saw some relief yesterday as Fed Chairman Jerome Powell testified regarding his nomination to retain his seat as Fed Chair for another four year term. The price of gold shot higher, rising well over one percent, on the notion that the Fed may maintain a high degree of flexibility as it looks to battle rising price pressures in the year ahead.
Powell did not push back on any expected rate hikes by the Fed, but rather solidified the idea that the Fed has allowed themselves maximum flexibility and optionality when it comes to dealing with price pressures. Put simply, the Fed’s path to policy normalization is not set in stone and could see many twists and turns along the way. Powell’s commentary yesterday sent a wave of relief through markets. The dollar declined, crude oil rose and the gold market shot up.
Any dollar weakness could set the gold market on fire. Recent dollar strength has likely been a major factor for gold’s lack of upside, and any relief from that dynamic is likely to have the opposite effect, sending gold sharply higher. Of course, inflation will remain a hot topic along the way as well, and this week’s inflation data could set the stage for dollar price action in the weeks ahead.
The Consumer Price Index released Wednesday showed a rise of 7% for prices in December. The release of Producer Price data today, however, showed a rise of just .2%, half of consensus estimates for a rise of .4% The data could potentially put gold into a holding pattern of sorts as some may now make the argument that inflation pressures have in fact peaked for the cycle.
It is likely far too early to tell if inflation has in fact peaked. The slowing pace of rises may, however, provide some clues about the threat of inflation moving forward and could be viewed as being bearish on inflation. That trend may not last long , however, and the price pressures seen in recent months could very well resume their strong upward trajectory without warning.
Investors may have to take a wait and see approach as to how inflation and the Fed may play out in the months ahead. The Fed has already penciled in three rate hikes and will also look to unwind its balance sheet in the months ahead. Numerous analysts have said the Fed will need to hike more than three times, and some are expecting the central bank to hike not three times but four at a minimum. Any increasingly aggressive policy changes by the Fed are likely to upset equity investors and drive volatility. The Fed will certainly want to avoid this, but having seemingly backed itself into a corner, it may be unavoidable at this point.
For the time being, the bulls will look to take prices above resistance in the $1840 area. The bears will target a decline below the $1775 level to get things going.