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The gold market is sharply higher Tuesday as investors return from the Christmas Holiday. The idea of China scrapping its quarantine rule for inbound travelers is a major step for the globe’s second-largest economy to reopen its borders. The Chinese news is not only providing a major boost to gold and commodity markets, but is also lifting stocks today. Tuesday’s gains have pushed the gold market back above the key $1800 level. Whether the bulls are able to hold this level is another question, however, as they have already failed to do so on multiple occasions. The next several days as well as the first days of 2023 may provide a significant test for the gold bulls. If they are able to hold the $1800 level, the market could gear up for an extended move higher.

The markets are likely to remain relatively quiet until the new year gets underway. The biggest question on the mind of investors may be what the Fed will do in the year ahead. The Fed has already slowed the pace of its rate hikes, raising rates by 50 rather than 75 points in December, while also alluding to a slower pace of rate hikes overall in the year ahead. The Fed does not appear to be done fighting inflation, however, as it also suggested rates may need to remain higher for longer. Exactly what that means is anyone’s guess, but the central bank does appear intent on finishing the job against inflation that it began a year ago. That could mean a terminal rate being reached in 2023 of as high as 5.5%, possibly even higher.

The Fed has made it clear that it does not want to begin cutting rates right away. A more likely scenario is the Fed will keep raising rates by 50 or even 25 points at a time, until it reaches the desired level. The Fed may then take a wait-and-see approach to determine how its previous rate hikes are affecting the economy and price pressures. Once the Fed feels rates have gone high enough, it may leave them there for some time before even suggesting any cuts may be imminent. This could mean that rates remain elevated until 2025, at which point they are likely to come back down significantly.

The Fed must get inflation under control to achieve any sort of economic balance. If the Fed fails to do so, any growth is likely to stop and the economy may find itself on very fragile footing, possibly even heading into recession. The Fed seems to understand the risks involved and appears intent on doing what needs to be done to solve the problem. Even if the Fed leaves rates higher for longer, it does not mean that gold cannot rise on a sustainable basis. Markets and investors know that rate cuts are coming. The only question about rate cuts is when they are coming, not “if.” The hope for lower rates may keep gold buyers involved in the months ahead and could keep the yellow metal from seeing any significant declines in the year ahead.