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The gold market is picking up where it left off last week. Spot gold is down over $8 per ounce in early afternoon action Monday. The market may be relatively quiet ahead of this week’s FOMC meeting. The Fed meeting is likely to announce a 75-basis point rate hike, although there are some expectations for an even larger rate hike of 100-basis points.

As the primary data point of the trading week, the Fed could drive gold prices lower or send them sharply higher. If the Fed sticks with the expected 75-point rate hike, gold could see a relief rally. If the Fed hikes by 100bps, however, the bears could pound gold sharply lower, taking out the $1700 level in the process.

Recent CFTC data showed an increase in net bearish positions in gold. Bearish bets are at the highest level since 2019 and could make the market very vulnerable to a major short-covering rally. Any signs given by the Fed that it may slow or even pause its rate hikes could be bullish for gold. Markets may have already priced in recent and expected hikes, but have not taken into account the risk of a Fed reversal or strategy change.

The notion of an aggressive Fed has field buying in the Dollar Index. The greenback now sits around a 20-year high, and its recent strength has almost certainly weighed heavily on the gold bulls. If the Fed decides to change its plans regarding interest rates or if it elects to even start lowering rates once again, the dollar could find itself in the midst of a major reversal that could take it sharply and rapidly lower. A major dollar decline could be just what the gold bulls need and could fuel a sharp reversal in gold that could negate much or all of the recent bearish sentiment.

It is important to keep in mind the last time gold’s positioning was this bearish. That time, gold reversed course quickly and embarked on a long rally that took it to all-time highs above $2000 per ounce. Could something similar happen this time around? Certainly.

Regardless of how much the Fed does hike rates this week, the focus will be on its commentary and strategy going forward. If the Fed sticks with its hawkish rhetoric and discusses raising rates aggressively in the fall, gold could see further downside. If the central bank takes a more dovish tone, however, the bills could jump into the market quickly and take control.

The gold bulls do have their work cut out for them, however, Prices would need to close above the $1775 area to negate the current downtrend. The bullish camp likely would not get excited about anything less than a close above the $1800 level. From there, the bulls would need to target and produce a close above $1900 to gain more momentum. The bears are targeting a close below the $1700 level and if one occurs, could set their sites on the $1650 area in short order.