The gold market is lower on Friday as a soaring dollar and rising bond yields take a toll on sentiment. Down nearly $30 per ounce as of this writing, the market is now back below the important $1650 level and could see a test of $1600 in the days ahead. Risk aversion is higher this week and is pushing stocks lower. Equities are at three-month lows today as concerns mount over Russia’s invasion of Ukraine and its threat to use nuclear weapons if threatened. Russian President Putin appears to have been pushed into a corner now, and that could make him even more dangerous according to some analysts.
Markets are also being driven by concerns over a recession. Earlier this week, the Fed Chairman fed into those concerns as he said the Fed would stay on track in its fight against inflation. Should the Fed continue with its aggressive rate hikes in the months ahead, stocks may come under increasing pressure and the bear market is likely to continue. The Fed will likely keep raising rates into the end of the year, what it does in early next year remains anyone’s guess at this point. In order to preserve what credibility it still has, the Fed may continue with its war on price pressures into next year, with interest rates eventually topping close to the 5% level. Powell did suggest that rates would then begin to come down again slightly in 2024 and 2025, but did not suggest the Fed would be looking to actively take them there.
The U.S. is not the only nation concerned about a recession. Recent data from the globe’s second-largest economy, China, have been weaker-than-expected. Unlike the U.S., however, China is taking the opposite approach and is easing policy to give its economy a boost. More weakness out of China may spell trouble for the global economy, and it could not come at a more challenging time. China’s troubles come at a time when the U.S. and other major global central banks are actively tightening policy to try to get inflation under control. The further these central banks tighten, the more pressure is put on the global economy.
The long-term narrative for gold remains quite bullish in our view. This means that any further declines in the value of gold now may represent an excellent long-term buying opportunity for the patient investor. The yellow metal could now see a decline all the way to the $1550 area before finding more solid footing. That might be OK with the long-term bulls, who would rather buy gold when it is on sale than at highly inflated prices.
Although the great turnaround for gold could take time to develop, it will come about at some point. When it does materialize, those who bought gold at current levels or even lower will find themselves laughing all the way to the bank. Those that didn’t may realize they have missed the opportunity of a lifetime.