The gold market finished the trading week on the strong side of the ledger, moving higher by about $7.50 per ounce. The bulls are trying to put some distance between spot prices and the $1700 level. Although spot prices remain below the $1720 level, the bulls do now have a bit more breathing room.
The gold market has been largely sideways for months now. The past several weeks have seen little in the way of sustainable movement as the market awaits the next FOMC meeting later this month. The Fed has been the source of much confusion and speculation in recent weeks and the meeting may provide markets with some more clarity about the central bank’s intentions.
The big question being pondered by investors right now is how far the Fed may be willing to go to tame inflation. Price pressures remain near 40-year highs. There have been some recent signs of inflation possibly having peaked already, however, and markets are paying close attention to them.
In addition to the inflation situation, markets are also watching the economy closely and monitoring it for recession. The U.S. could possibly be already in a recession, and some recent data from China may indicate that the world’s second-largest economy is not far behind. Worries over the possibility of a recession have been on the rise in recent months as the Fed has, thus far, stood its ground and continued to hike rates aggressively. More of that is expected this month when the FOMC meets again. Fed Funds are pricing in near even odds of either a 50 or 75-point hike this month.
The Fed is likely to finish out the year on the aggressive side, likely hiking rates until the end of the year. After a few more hikes are implemented, however, it becomes far less clear what the Fed may or may not do. Some have suggested the Fed is likely to take a pause in the new year, or even reverse course and begin easing policy as tighter conditions take their toll.
What this may mean for the gold market is also unclear. A looser Fed could, however, dent expectations for the dollar and treasury yields, bringing both down in the process. Any significant weakness in yields or the dollar could be bullish for gold and could potentially fuel a sustainable rally higher. The bulls could try to push prices higher in the near-term. Any moves higher right now would be suspect, however, as the market may currently be lacking the necessary ammunition for a sustainable run to the upside.
The next several weeks will see the gold bulls target the $1750 and $1800 levels. If able to produce a close above $1800, the bulls could find themselves in business for a run to the upside. The bears are trying to produce a close below the $1700 level and if able to do so could see prices embark on a fresh and significant leg lower.