Blog

The gold market is a bit stronger today. Prices have still not retaken the $1850 level, however, and therefore could remain vulnerable to another wave of selling in the days ahead. Investors today are reacting to some conflicting market fundamentals, including a solid decline in yields and the dollar. Those declines are being offset by a large decline in crude oil, however, and the market had little reaction to Fed Chairman Jerome Powell’s comments today regarding inflation.

In prepared remarks, the Fed Chief suggested that the central bank would continue on its current hawkish poath, raising rates as necessary to bring down problematic inflation. The Fed Chief’s remarks were characterized as not-surprising and the gold market did not show much price movement in light of them. Inflation has been a major source of market concern for months now. Despite the Fed’s aggressive interest rate hikes to combat it, it is unlikely the Fed will be able to turn down the heat on rampant price pressures. The central bank may simply end up giving up on inflation and possibly even reversing course, possibly lowering rates again by early next year.

While inflation remains a major global problem, gold investors do not seem overly thrilled about buying gold because of it. The market seems to be more interested in the possibility of a recession at this point in time, and what a recession could do to overall demand. Should the U.S. or globe enter a recession, demand for gold could potentially slow significantly. This downturn in demand could have a bearish effect for prices which already appear to be struggling to gain any upside momentum.

The gold market has been range-bound for several weeks now and is thus far not showing signs of a breakout or breakdown. While the bulls have been unable to maintain trade above the $1900 level, the bears have also failed to take prices below the $1800 area. These two levels represent the technical keys to the kingdom at this point. A breakout above or breakdown below these levels may signify the market trend for months to come.

As the Fed looks to fight inflation in the months ahead, it is likely to become increasingly frustrated. Given current inflation levels, the Fed may be unlikely to have a significant impact on price pressures without going “Volcker” style and raising rates to the 20% level. Such a move seems extremely unlikely at this point in time, but without such a move the Fed may not be able to tame price pressures any time soon. If the Fed elects to stay put or reverse course later in the year, it may potentially avoid a recession but could usher in an extended period of stagflation in which prices remain elevated while employment and economic activity decline. Such a scenario would not be a positive and could, for that reason, lead to strong gold demand and higher