The gold market is seeing some buying today as the dollar and yields sink. The Dollar Index hit a fresh four-week low in the overnight session while yields for the benchmark 10-Year Note have fallen to 2.797%. The improving technical posture of the yellow metal is likely encouraging some buyers to step into the market. The more distance the bulls can put between current prices and support at $1850, the greater the likelihood the metal will test the $1900 level in the days ahead.
Stocks have opened the session lower, sharply lower in fact with the benchmark Dow Jones Industrial Average down by over 400 points in early action. U.S. equities are now in or very near bear market territory, defined as a decline of 20% or more from the highs. Inflation concerns, geopolitics and an increasingly aggressive Fed are all holding stock investors at bay and may keep the downside pressure on equities for months to come. As stocks falter further, much of the capital flowing out of equities could find its way into gold and other metals.
Stocks could indeed have some rough going ahead if the Fed sticks to its current plans. The central bank recently raised the key interest rate by 50-basis points. Such a hike is now expected at the next two consecutive meetings and a 75-point hike has not been completely ruled out. The Fed seemingly means business this time around and could very well stay the course to get inflation under control. As the Fed tightens policy, however, it could have a negative effect on stocks and risk assets. The Fed has to choose between higher stocks and lower inflation and has apparently chosen lower inflation.
There is no telling how low stocks could potentially go as the Fed raises rates. Some analysts have suggested a decline of 20 to 25% while others believe that equity markets may be cut in half. Either way, lower equities may be bullish for gold and much of that capital formerly invested in stocks could find its way into gold in the months ahead.
The gold market remains in no man’s land on the charts. The bulls will need to produce a close above resistance at the $1900 level for them to get excited. The bears are still looking to produce a close below support at $1800. Until one of these areas is broken, either up or down, the market may trade mostly sideways. The range bound price action could attract further buyers, however, as the failure of the bears to take prices sharply lower could be viewed as a bullish signal. Even if the bulls do accumulate here, however, they will need to take prices higher at some point and sustain those gains to keep buyers interested. The next few sessions may be very telling about the market’s intentions as prices are now within striking distance of the $1900 level.