Federal Reserve on Hold
The gold market is seeing some moderate buying in early action Monday as the new trading week gets underway. The rise in gold is being attributed to a sharp decline in the New York Fed Empire State Manufacturing survey. The New York Fed data showed a reading in general business conditions of 18.3, well below the consensus estimates for a reading of 28.9. The data also was the largest decline seen in the economy since the viral pandemic took hold last year and put the brakes on the economy.
The report also showed inflationary pressures remain as companies look to pass higher costs onto consumers. Overall the report is the latest piece of economic data that may keep the Federal Reserve on hold for the time being. Concerns over the Fed and the potential for the central bank to begin tapering its stimulus measures has grown in recent weeks. Any economic data that misses estimates may give the Fed something to think about as it does not want to pull the plug on stimulus too early and risk the economic recovery in the process. The Fed is also fighting a rise in inflation, however, that some have suggested could make it begin tapering sooner rather than later.
Fed tapering poses a threat to the recovery and could cause investors to bolt for the exits. Many analysts have suggested that the Fed stimulus measures are a primary, if not the main, reason for stocks at current all-time high levels. If those measures are halted, one has to then wonder how equity markets could react. A sharp sell-off could potentially be seen, or possibly a trend reversal lower that sees equity markets trend lower for months or longer, sending the bulls packing along the way. Such a scenario could prove to be bullish for gold, as investors could be forced to seek out alternative asset classes that not only have upside potential but can also fight higher inflationary pressures.
In addition to the ongoing flow of economic data, the gold market will also be watching the fight against the Covid-19 Delta variant. The variant has spread rapidly, far more rapid than the original strain, in fact. It is having a major impact in certain areas, with China and other parts of Asia being hit especially hard. The longer the variant spreads, the more dramatic
the potential effects on the global economy. With supply chains already under strain from the first form of Covid, the variant has the potential to put a halt to economic activity in some parts of the world and to send the global economy into recession.
The gold market is quickly approaching previous support at the $1800 level after seeing prices recently trade below the $1700 area. A move back above $1800 on a closing basis would almost certainly encourage the bulls and add to buying interest. The bears, on the other hand, will look to keep prices below the $1800 level and to push prices back below the August lows under $1700 per ounce. The bears still have control on the daily chart, although recent bullish momentum may tilt the scales today or in the coming days if market strength persists.