The gold market has certainly seen some ups and downs in recent months. Worries over inflation, dollar weakness and uncertainty over central bank policies have all been bullish for gold. An increasingly hawkish Fed has, however, pierced that balloon of bullishness and let out much of the air in recent weeks. The Fed has not only announced its plans to begin tapering its monthly security purchases but has also now said it will look to wrap up those purchases at a faster pace than expected. This means the Fed could possibly be done with its monthly security purchases as soon as March. The central bank could then begin to hike rates right away as it has already penciled in multiple hikes for 2022.
As is so often the case, however, the Fed could be wrong. The Fed has judged economic strength to be enough to carry the economy through a series of rate hikes. While the Fed could be correct in its assessment, it also stands to reason that equity markets and risk assets could see prices crumble once the tightening process begins. Stocks have risen over several years now and many analysts believe the primary reason for the seemingly never ending upside in equities is the easy Fed monetary policy. Markets and investors do like free or cheap money, after all, and the Fed has gone out of its way to provide a whole lot of it in recent years. Once the Fed turns the spigot off, however, is when things could get interesting. That day seems to be quickly approaching at this point and it is unclear if anything may change the bank’s thinking at this stage of the game.
In what may be a sign of underlying strength, gold is holding onto some gains today even as the economy posted third quarter activity that was stronger than expected. The economy grew by 2.3% for Q3, higher than the consensus estimates for a 2.1% rise. The more robust data set could potentially fuel downside in gold, as it could pave the way for the Fed to begin a more aggressive policy stance. The bulls did not seem overly interested today, however, and that could be due to several reasons, one of which is the day’s low trading volumes and lack of activity. This lack of activity is likely to continue through the first of the year and it may be difficult to trust any market action until larger players and volumes return.
The next several weeks should be more exciting. As investors return to the marketplace, prices could see heightened volatility and more sustainable moves in either direction. The gold market could see a rapid rise back above the $1800 level, and with some key resistance cleared out, could go on a rapid run higher that could even take it back towards previous all-time highs or beyond. Of course, the market could also become increasingly vulnerable to more selling. A run below the $1750 area could set the market up for a dramatic decline that could see mid $1600s or lower before it ends.
We continue to believe, however,. That the long-term outlook for gold is bullish and that prices will be higher, much higher, in the years ahead. The yellow metal could show how much patience pays as it is likely only a matter of time before new all-time highs are achieved.