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The gold market is seeing higher prices in early afternoon trade as choppy trade continues. The market has trade on both sides of the unchanged level today as investors ponder several key issues. The dollar and yields are both on the rise today, which is a negative for gold. Some bargain hunting and short covering are working in gold’s favor today, however, providing some balance to the market.

Investors continue to monitor and evaluate the war in Ukraine, inflation and the Federal Reserve. Some Fed officials today discussed the importance of getting interest rates to a neutral level as soon as possible. A 2.5% interest rate would neither support nor detract from the economy and the neutral rate may even help stop inflation. Given the fact that inflation is still at 40-year highs, the Fed has pledged to do whatever it takes to quell it, using all of the tools at its disposal. The Fed recently raised the Fed Funds rate by 50 rather than 25-basis points in a move likely to be repeated at the next two consecutive FOMC meetings.

However it does it, the central bank is likely to want to see rates at 2.5% or higher as quickly as possible. Although it has been discussed, a 75-point rate hike remains unlikely, however, as the Fed may have to tread carefully, not wanting to upset equity and risk asset markets. Avoiding negative feelings about higher rates may not be possible, however, and the stock market is already moving solidly lower despite last week’s six percent rise. The threat of higher rates and an increasingly aggressive Fed may keep equity investors ready to sell and volatility at a heightened level. As stocks sink further, assuming they do, it begs the question of whether much of that investment capital will find its way into gold. We believe it will and lower stocks may prove to be the key to sharply higher gold in the months ahead.

Although weaker equities may provide gold a boost, the metal will also have some issues working against it. An aggressive Fed and higher real interest rates are a primary obstacle to higher gold. The threat of a recession could give gold a boost or could send investors running into cash. Dollar strength could continue if the Fed follows through with its plans for higher rates. A stronger dollar may make gold less attractive for foreign buyers as it makes the metal relatively more expensive. Of course, should the Fed not follow through or even reverse course, the dollar could get crushed and resume its long-term downtrend. In this case, gold stands to benefit significantly and a sharp move lower in the currency could put gold back at all-time highs rapidly. The $1800 and $1900 levels remain the keys for the next move in gold. Whoever produces a close above or below these levels is likely to determine the near-term trend.