The gold market is not having a good day Thursday as spot prices are declining by some $25 per ounce. The selling in gold and silver today is being attributed to inflation fears and a stronger dollar. The U.S. Dollar Index has hit a 1.5-year high today as there may be growing belief in significantly higher interest rates in the year ahead. Traders can be a fickle bunch, however, and despite today’s sell-off in the metals, gold and silver could both return to a more bullish trajectory in short order if inflation persists.
The gold and silver markets are being sold as fears over an increasingly aggressive Federal Reserve grow. The Fed has only elected to begin tightening its monetary policy, however, due to the growing inflation problem. Rising prices have historically been a bullish factor for gold and there is simply no reason to think that may differ at all this time around.
In addition to Fed fears, the markets are also paying close attention to the ongoing data stream. Earlier today, fourth quarter GDP was released and showed a rise of 6.9% compared to consensus estimates looking for a rise of 5.5%. The Personal Consumption Expenditures index, or PCE, registered a reading of 6.5% annually in the fourth quarter. This reading was considered to be “hot” by many and points to the ongoing problem inflation has become. Even the weekly jobless claims data was upbeat and there does not appear to be much standing in the Fed’s way of taking interest rates higher and shrinking the balance sheet. Not only that, but today’s data also likely gave the dollar a major boost, and that dollar strength is likely a key factor in gold’s downside today.
Today, markets are still digesting the Fed policy meeting conclusion from yesterday. Although the Fed announcement did not have much, if any, effect on markets, Chairman Powell’s press conference following the announcement may have given markets something to think about. Powell was viewed as being more hawkish than expected, and it now appears that the central bank may be in a lot more of a hurry to get inflation under control. Powell alluded to employment being at a maximum, giving the Fed only inflation to worry about at this point. While the Fed has clearly fallen behind the inflation curve, the question now is just how far the Fed may be willing to go in order to catch up.
A period of heightened volatility could be in store for stocks and risk assets as investors await further clues from the Fed. The first of several rate hikes is now expected in March, and the Fed could at that time lay the groundwork for its plans for the rest of the year.
In the meantime, the gold bulls will remain focused on taking out upside resistance in the $1850 area while the bears look for a close below the $1800 level. A move in either direction could pave the way for an extended move that could take gold significantly lower or back towards all-time high levels.