The gold market is higher on Friday to cap off an interesting trading week. The yellow metal is up by nearly $12 per ounce in mid-afternoon action and is rapidly approaching the $1800 level. The metal broke out of its recent trading range following the latest FOMC meeting and thus far has not looked back. If the bulls are able to retake the $1800 level, look out, as the market could go quite a bit higher in short order.
Although the recent FOMC meeting was a bit market-moving, it was this week’s slower CPI data that has markets on the move. The latest reading on price pressures registered a rise of 7.7% from the period one year ago. That reading, while still high, is well below consensus estimates for a rise of 8.2%. The drop in inflation could mean that the Fed’s rate hikes are actually chipping away at inflation and making a dent. Markets felt a sudden and significant sense of relief upon the release of the data. Now, questions may arise as to what the Fed may do even as soon as next month. The biggest question, however, is how the Fed may approach policy as 2023 gets underway.
Also affecting gold this week was the meltdown seen in crypto markets. The liquidity crisis at FTX sent shockwaves through the sector. Crypto investors may now be more concerned about their capital than they were earlier in the year. Cryptocurrency prices took a major hit on the debacle, and leader Bitcoin is now well below the $20k level once again. The importance of the crypto meltdown for gold is significant. Bitcoin and other digital currencies had been viewed as a potential substitute or competitor to gold for safe haven buyers. That no longer seems to be the case, however, as investors rapidly fled the cryptocurrencies and turned to gold. The metal’s place as the #1 perceived safe haven seems quite intact at this point. Cryptos or other assets are very unlikely to pose any legitimate threat to gold’s status anytime soon.
The slowdown in inflation could be due to a variety of factors. The question is not what may have caused it, but whether it will stay around. If inflation begins to trend lower, the Fed may have far more flexibility when it comes to policy and interest rates. If the Fed elects to take a pause on its rate hikes, it would likely be very bullish for gold as the dollar and treasury yields would likely decline. Should the Fed at some point decide to start easing rates again, the sky will become the limit for gold.
In the meantime, the bulls will target a close above the key $1800 level. The bears will try to take prices back below the $1700 breakout point. After this week’s gains, the market may need to do some back and filling before further upside is seen.