The gold market is on the offensive today as crude oil prices continue their recent ascent. Crude prices are up by nearly $5 per barrel in late morning trade as the notion of a boycott of Russian oil takes hold. Stocks are solidly lower on the day thus far as risk aversion remains robust. Although the war in Ukraine has continued, nothing much of substance has come to light lately. President Biden will be meeting with NATO leaders and allies tomorrow to discuss the invasion and possibly even additional actions against Russia.
The Russian/Ukrainian war is certainly a source of market anxiety. In addition to the war, however, investors are also left fearing rampant inflation that has seen prices skyrocket in recent months. Not only might the Fed be forced to battle inflation through monetary ;policy decisions, but those decisions could have negative effects of their own. The 2-year and 10-year yield curve is close to inverting already. An inverted yield curve could point to a looming recession. Without question, if the Fed acts more aggressively towards policy than previously thought, the economy will feel the not-so-subtle effects. This slowdown could in turn lead to sharply lower equity markets and selling across risk assets that could change market dynamics for years to come.
The Fed recently raised the Fed Funds rate by 25-basis points in a move that was widely expected. Without the war in Ukraine, the central bank may have been more aggressive and could have raised rates by 50-basis points. Fed Chairman Jerome Powell this week left the door open to larger rate hikes or more of them. His commentary would seem to suggest that a 50-point hike could be seen in the next month or two and that markets should not be taken by surprise by such a move.
Since reaching new all-time highs earlier this month, the gold market has been on the defensive as prices sank by well over $100 per ounce in just a couple weeks time. Price action around current levels may be viewed as noise, however, as the bulls and bears are fairly far from any targets of consequence. The bulls would like to produce a close above resistance at the $2000 level. The bears would like to see a close below the $1900 level and then $1850. Prices in between these areas may not mean much. Time will tell which way the market goes. Prices could very well spend several weeks or longer in this range, however, as investors await further inputs on both the war as well as monetary policy before placing any big bets. The formation of a bearish pennant pattern on the daily chart will not help the bulls, and could even lead to rising selling pressure that could see the bears test the $1900 level before abating. Market volatility is likely to remain high as the war rages on and before more is known about the Fed’s outlook and plans.