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The gold market is lower in late morning action on Thursday as bearish outside market action takes a toll. Not only are outside markets in a bearish posture for gold today, but some hawkish Fed commentary is also playing a role in gold’s downside. A strong rally in the dollar today combined with significantly weaker crude oil prices is not doing gold any favors. Add to that the hawkish Fed rhetoric today and you have a recipe for lower gold prices.

St. Louis Fed President James Bullard said today that he feels at least another 125 basis points of hiking is necessary. That would put the Fed Funds rate at 5-5.25%. Kansas City Fed President Esther George also sounded hawkish today, suggesting that she did not know how to bring down this level of inflation without inflicting significant slowing, possibly even a contraction in the economy to get there. As an increasing amount of discussion on the Fed’s plans is now taking place, now is not a great time for some to lean hawkish and some to lean dovish. A lack of clarity may be the worst case of all, in which investors do not have a strong sense of what the Fed may do or when it may do it.

The Fed seems certain to hike again next month. A December rate hike may not be as tall as previous hikes, however, and could come in at 50 or even 25 basis points. Markets do not appear concerned with what the Fed does next month, however, and appear far more focused on what the Fed may or may not do come 2023. If the Fed continues to raise interest rates into next year, the odds of a recession could increase dramatically. If the Fed elects to take a pause, it may be able to avoid a recession but it may not necessarily appease equity investors. If, or rather when, the Fed decides to start easing rates again; stocks, gold, and other assets could skyrocket. It does not seem to be a question  of “if” the Fed will start easing, but rather a question of “when.”

The downside in gold being seen Thursday may not just be due to outside markets, but may also be due to gold needing a pullback before being able to continue higher. The market recently broke out of an extended trading range, and as long as the bulls hold the $1700 level the market could be poised for further upside. For now, the bulls will target a close above the $1800 level. The bears will look to produce a close below $1700, pushing gold back into its previous trading range and potentially nullifying the recent upside. A bullish breakout above $1800 could set the stage for a sharp leg higher. That leg could potentially even take the market back toward previous all-time highs or beyond.

The long-term bullish thesis for gold remains firmly intact. The outside markets not cooperating today is likely due to the Fed and its rate hikes. Once the Fed decides to change course, however, the dollar and yields could see a tumble. That decline could make the road higher much easier for gold and could fuel a run back to all-time highs in a short period of time.