The gold market is once again ewing some pressure today as rising bond yields and a stronger dollar take a toll. The gold bears have taken process below support at the $1850 area, making a challenge of the $1800 level a distinct possibility in the days ahead. Should the market break down below the $1800 area, it could set the stage for a fresh and significant leg lower in price that could see the market reach as low as $1700 before finding some solid buying interest. If the bulls are able to reverse the current trend, however, the market could see a sharp rise to $1900 or even beyond as shorts are forced to cover.
As traders and investors return from the long Memorial Day Holiday weekend, they appear ready to pick up where they left off last week. That means lower stocks, lower gold and rising yields. The trend of higher yields and dollar strength may continue to weigh on the yellow metal in the months ahead unless something changes. The Fed has suggested strongly that it will stay the course and keep taking rates higher to battle inflation. Should the Fed decide to “pause” or reverse course, it could potentially lead to a major reversal in yields and the dollar and could send gold skyrocketing higher. Even if the Fed does take rates sharply higher from current levels, real interest rates would still be very low and those rate hikes may not have a major impact on gold. The bottom line is this: Gold may stand to benefit regardless of what the Fed does or does not do in the months ahead.
As if inflation and the Fed were not enough for markets to worry about, Covid lockdowns in China have also played a large role. Those lockdowns may finally be easing, however, and if so, it could help loosen up global supply chains and inflation. The world’s second-largest economy posted some encouraging economic data recently. Its official Purchasing Managers Index saw a rise for May to 49.6. Although still under the key 50 level, the reading is a big improvement from the 47.4 reading registered in April. China could be a major influence on the global economy in the year ahead. Any other Covid-related issues such as lockdowns could have devastating effects on global growth.
U.S. President Biden will be speaking today with Fed Chairman Jerome Powell about the inflation problem. What those discussions may uncover is unknown, although it is possible that Biden may be looking for more assistance from the Fed and ideas on how to squash inflation sooner rather than later. Regardless of what the Fed or the government does, price pressures are likely to remain for some time to come. That, along with the current geopolitical scene and risk of recession may keep demand for gold robust in the months ahead.