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The gold market kicked off the trading week on a sour note as risk appetite improved and worries over a recession eased. Spot prices are lower by over $3 per ounce in mid-afternoon action. The metal bulls are attempting to hold their own so far this week, and prices visited both sides of the unchanged mark during the day’s session. Not only are investors a little less worried over a Fed-induced recession today, but recent declines across the raw commodity sector could be pointing towards a peak in inflationary pressures. If that is the case, the Fed may not feel the need to hike rates as aggressively as anticipated and that could potentially be bullish for gold.

The Russian/Ukrainian war rages on with no end in sight. It was reported today that Russia had defaulted on its foreign currency obligations. Rating agencies have not labeled a default, however, as they previously withdrew their ratings from Russia. In other news regarding Russia, the Group of Seven nations announced new sanctions against Russia. The sanctions include the banning of Russian gold imports in what could be a significant move. Russia has spent the last several years beefing up its gold holdings,  and if unable to use them could eventually find itself in a financially challenging situation.

Outside markets are fairly quiet today. Crude oil is higher, the dollar is lower and yields are steady. While investors may be breathing a tad easier today regarding the outlook for inflation, price pressures do have the potential to increase from here or become entrenched. If they do, it could fuel a major paradigm shift within global markets. Central banks would no longer be able to ignore periods of rising prices and write them off as temporary. Significant price increases could become increasingly extended in nature and could keep central banks from easing policy the way they might otherwise want to. Any way you slice it, a long period of stagflation could be brutal for both the economy itself and households.

Markets will need to endure some pain to prevent inflation from becoming entrenched, if it has not already. These pains, such as rate hikes or money supply contractions, are small compared to the pain that could be brought about during an extended episode of stagflation. The next several months could, therefore, be filled with increasing volatility as markets attempt to guess the Fed’s thoughts and how it may adjust policy on an ongoing basis. Some have even suggested the Fed is likely to reverse course by the beginning of 2023, as it succumbs to the pressure associated with driving equity markets and risk assets lower.

The Fed needs to stay the current course this time around. Pausing its rate hikes or even reversing course and lowering rates to appease stock investors could lead to stagflation while also eroding any credibility the central bank still has.