The gold market is higher again today, having pushed slightly above the $1750 level. Gloomy economic data is the primary factor in today’s upside, with the Federal Reserve possibly taking a more dovish approach also playing a role.
The U.S. economy unexpectedly showed a contraction for the second-quarter today. Consumer spending was at its slowest pace in some two years and business spending also declined. These could fan the fears of a coming recession or possibly even point to a recession already being in place. A slide in U.S. Treasury yields today also fueled upside for gold and could continue to do so if yields continue to descend.
With today’s GDP data seemingly confirming recessionary fears, the Fed may find itself having to slow the pace of further rate hikes or raise rates in smaller increments. Yesterday, the Fed raised rates by another 75-basis points. The gold market seemed to be pleased the Fed did not hike by 100-points, and a relief rally ensued once the announcement was made.
Fed Chairman Powell left the door open for what the central bank may do come September. He said that another large rate hike is a possibility, but the Fed would watch the data until then and allow it to dictate Fed action. The commentary from the Fed Chief was noticeably less hawkish than previous commentary and could point the way towards a Fed pause or even reversal.
The next several weeks may see little price action in gold as the summer doldrums are in full gear. The market may begin to make a meaningful move come the end of August, however, in just a few short weeks. Until that time, the markets may pay close attention to the data stream as well as any fresh developments out of Ukraine. Should more weaker-than-expected data be released, the chances of another large Fed hike may dwindle substantially. If the data steam shows strength, however, the Fed could be forced to consider an even larger 100-point rate hike.
After providing a degree of relief yesterday, the Fed may now consider its approach. Months of hawkish rhetoric have been followed up by several rate hikes this year. The Fed has, thus far, preserved whatever credibility it has. The Fed may now, however, find continuing aggressive rate hikes even more challenging and it could see fit to reverse course.
Until more clarity is seen on policy and what the Fed may do, the gold market may remain mostly sideways. The bulls have done a good job so far of absorbing much of the selling pressure. Whether they can continue to do so remains to be seen, but will likely become known in the weeks ahead.
In the meantime, the $1700 and $1800 areas remain key technical levels within the gold market. Whichever side is breached on a closing basis could point to more movement in that direction. The recent volatility contraction could point to a large move ahead.