The gold market is slightly lower in mid-morning trade Friday. The yellow metal is not showing much of a reaction to changing inflation expectations and a corresponding drop in consumer sentiment data. The latest University of Michigan Consumer Sentiment data declined to a reading of 68.8, down from the previous month’s reading of 70.0. The decline, according to some analysts, can be attributed to the survey’s inflation expectations.
According to the survey, inflation expectations for the year rose to 4.9%, up a tick from the previous month’s reading for a rise of 4.8%. The longer-term 5-10 year inflation expectation reading also saw a climb, rising to 3.1% from a previous reading of 2.9%.
Inflation data has been the talk of the town in recent months, and this week was no different. In addition to today’s data, the Consumer Price Index (CPI), released earlier this week, showed a rise of 7%.
The threat of rising and ongoing inflationary pressures may keep investors on their toes in the months ahead and could fuel market volatility in the year ahead. The Fed has already said it will taper its monthly security purchases at a faster rate and has penciled in three rate hikes for the year ahead. Whether three rate hikes will be enough is the subject of debate, as numerous analysts, including an economist from Goldman Sachs, have suggested the Fed will need to hike rates a minimum of four times to get inflation under control.
The notion of rapidly rising interest rates could put stock investors on edge and may also be a major factor for market volatility in the year ahead. The Fed certainly does not want to upset equity investors or send waves through the markets. The central bank may be forced, however, to decide whether to let inflation run hot or risk a major stock market sell-off and reversal. The Fed now seems willing to let equities turn lower and appears more focused on the risks posed by inflation than employment or other issues. An increasingly aggressive Fed could not only fuel selling in stocks and risk assets, but may actually also drive buying in gold and perceived safe havens. In fact, the gold market may begin to really rally and eventually break out of its trading range to the upside once the Fed does start to raise rates. This may be contrary to popular belief but has happened before and is likely to happen again.
Gold remains in its trading range for the time being, but has shown some positive sign in recent weeks. The bulls have been able to take gold back above the key $1800 level on a closing basis and will now set their sights on resistance in the $1840-$1850 area. A breakout above this could pave the way for much higher prices in a short period of time. The bears will continue to look for a breakdown. The first target for the bear camp is taking gold below the $1800 level. From there, a decline below $1775 would be next.