Following Wednesday’s surprise 75-basis point rate hike from the Fed, the gold market is higher as stocks are getting hammered. Although the 75-point hike was not totally unexpected, markets believed the Fed would raise rates by 50-points. The higher rate hike and expectations for another 75-point hike at the next FOMC meeting have heightened recession fears, and there may now be nothing to prevent a major economic slowdown from coming. Fears of that slowdown are almost certainly the primary factor behind today’s major stock sell-off.
The plunging of the Japanese Yen versus the dollar is also impacting markets. The yen has shed about a third of its value against the greenback over the last 1.5 years. As the Bank of Japan keeps its monetary policy easy while the rest of the world is raising rates, this trend could continue. The weakness of the yen may be another symptom of a sickness within the economy and more trouble to come.
These factors may be limiting the downside in precious metals. The bulls have become frustrated, however, due to the lack of any sustainable rallies in the metals. An eventual rally may become increasingly likely the longer inflation remains strong, however, as history has shown that high inflation favors hard assets over paper. The bulls may be forced to simply bide their time and wait. Recent downside in the gold market may have produced an excellent long-term buying opportunity for patient investors.
Gold prices may also be moving higher today on some weaker than expected economic data. The latest reading of the Philly Fed Survey showed a contraction of -3.3. The figure missed market expectations by a large margin as estimates were looking for a reading of 5.1. The housing market also saw a sharp decline in May. Both housing starts and building permits slid more than expected in May, with a decline of 14.4% for housing starts and a decline of 7% for permits. Weaker than expected market data could give gold some buoyancy, as it may keep some from assuming the Fed will continue its recent hawkish path. Should the Fed decide to pause or reverse course on rate hikes, it could send some very confusing signals to markets, however, and possibly lead to an extended period of stagflation.
From a charting standpoint, the gold market remains stuck in neutral. The market is rapidly approaching resistance at the $1850 level today, and could stage a challenge of this area today or in the days ahead. On the other hand, if the bulls challenge $1850 and the market fails to breach it, a fresh wave of selling could enter the market and finally take prices below key support at the $1800 level. For the time being, the $1800 and $1900 levels are areas of focus for the bulls and the bears. Whichever level is breached first, on a closing basis, could determine the metal’s trend for the months to come.