The gold market is seeing some buyers step in this week as the Dollar Index comes under renewed pressure. In addition to the weaker dollar on Tuesday, gold also likely got a bounce higher from stronger crude oil which traded over $60 per barrel Tuesday.
The gold market has continued to hold off recent selling pressure, however, it remains unclear how long the market may be able to stem the tide of willing sellers. After hitting a nine-month low overnight, the gold market saw a mild corrective bounce higher. The yellow metal has been hampered of late, as dollar weakness has subsided and as stock markets have continued to march higher. The benchmark 10-year U.S. Treasury yield now stands around 1.44%. A slight decline in yields sent stocks roaring higher on Monday, although many analysts seemingly believe the recent ascent in yields could continue.
The topic of potential inflation has been a mainstay in financial media for weeks now. Overnight, data from the Euro Zone showed an inflation reading of up .9% after a January reading of .9% higher. Although inflation has seen a slight climb according to some key data points, it remains quite far from the levels associated with being problematic. Inflation data later in the year may become more telling, as it would paint a better picture of global economies that are starting to run hot.
The Fed is also likely to continue to play a key role in gold’s fortunes. The central bank recently suggested that it plans on keeping its easy money policies in place, despite the potential for an inflationary battle. The recent rise in yields was seeming to suggest the Fed could begin to tighten sooner than expected. The Fed has, however, quelled that notion as it looks to get more Americans back to work. The labor market may hold the key to when the Fed reverses course, and the central bank is likely to take extra caution before tightening too soon in order to make sure as many Americans benefit as possible. Inflation is still running below the Fed’s desired 2% annual target as well, and the Fed will likely want to see inflation run at or above 2% for a period of time before it starts to tighten policy. The idea of an accommodating central bank may keep the gold market and other hard assets in play for the foreseeable future.
Make no mistake, however, the gold bulls do have their work cut out for them. The market remains dangerously close to near-term support. A breach below recent support could set the stage for a significant leg lower that has the potential to wipe out any bullishness in one swift stroke. A breakdown below the $1700 could trigger a large wave of selling that could drag the market sharply lower.
The bulls on the other hand, have their eyes set on a close above the $1800 level. A solid close above this area could fuel further buying interest in the market as traders and momentum players look to jump on the bandwagon.