The gold market is modestly lower in late morning trade Thursday. Some downside is to be expected, however, following recent upside gains that have driven the market through key overhead resistance. The market is now within striking distance of the $1900 level, but may need to take a brief breather before it attempts to overtake this level on the upside. A move above $1900 on a closing basis could set the stage for a rapid move higher that could potentially see the bulls challenge previous all-time highs.
The gold market may also see several weeks of sideways action at this point. A period of market consolidation could be in store as investors await more clues from the Federal Reserve about its tapering plans and possibly even plans to raise interest rates. The Fed has maintained that it is in no hurry to raise interest rates and that rate hikes need not follow the conclusion of the QE tapering. Recent economic and inflation data could force the Fed’s hand, however, as inflation does not appear to be transitory in nature. Not wanting to send stock markets lower or to boat volatility, the Fed is likely to hold off on any rate increases for as long as it possibly can. The Fed waiting could put the central bank even further behind the inflation curve and could lead to even more significant price pressures in the months or years ahead.
Up in the air currently, the path of Fed action may be the primary driver of gold in the months ahead. Not only are Fed actions unknown at this point, but who will be leading the central bank is also not known. Potential Fed Chair candidate Lael Brainard, for example, is widely considered to be a major dove. Indications that he could be the next chief of the Fed could add some upside to gold. As the gold market awaits further Fed clues regarding policy and a better idea of who may lead the central bank, the market is likely to find itself in a holding pattern.
Gold bullion stands to gain handsomely on further increases in inflation. Those gains may be tempered significantly, however, by the rising likelihood of rate increases. Higher rates would increase the opportunity cost of holding gold and could make the path higher more challenging for the bulls.
The dollar could also have a significant impact on the gold market in the months ahead. After hitting a 16-month plateau last night, the greenback is backing off a bit today and may simply need to catch its breath. Any hikes in rates could also boost the dollar, also providing the gold bears with more ammunition to take prices lower or stall the rally out.
For the time being, the bulls are in firm control of the daily chart. Any significant dips are likely to be bought and bought aggressively. Recent upside has bought threw bulls some time. The market may now spend some time consolidating before attempting a fresh leg higher.