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Although the gold market finished Monday’s session lower by over $5 per ounce, the metal was fairly quiet throughout the day today. Now at $1787 and change as of this writing, the bulls have not let the bears take the market too far below the key $1800 level. The gold market may, in fact, remain sideways for the next two weeks as investors take off for the holidays and the new year is celebrated.

In some bullish news for gold today, the metal saw an increasing amount of bullish bets from hedge funds. The metal saw inflows last week of over $3.5 billion as it may be seeing some benefit from changing Fed policy expectations. While an easing of inflation could be considered bearish for gold, that same easing could also allow the Fed to take its foot off the gas pedal and stop raising rates aggressively as it has for months now. The Fed did just last week hike rates, but by only 50 points this time around rather than the 75 points that had become the norm in recent months. Any further signs of inflation letting up could be bullish for gold as they may keep the Fed sitting tight rather than hiking rates.

According to recent CFTC data, the gold market is now net long some 37,449 contracts. It also saw shrinkage in the total short position, which declined by 3,854 contracts. If the hedge funds and large market participants are getting bullish again, that could lead to good things for the yellow metal in the weeks and months ahead. The market is now the most bullish it has been since early October and that could lead to the bulls retaking and maintaining trade above the key $1800 level.

Of course, expectations can and do change. Much of how interest rates play out in the year ahead will be determined by the inflation data. If the data continues to show easing price pressures, the markets may be a lot closer to the first rate cut than previously thought. If the data shows a rebound in inflation, however, look out below. Stocks and gold could both decline significantly if fears of an aggressive Fed resurface. The Fed has already alluded to the fact that it feels rates need to stay higher for longer. This could make the first several months of 2023 interesting as the Fed could also keep raising rates albeit by fewer basis points per hike. The Fed raising rates may continue to make markets nervous, as it has in recent weeks, about the Fed leading the economy into a recession.

Whether a recession develops or not remains unclear at this point. One thing is very clear, however: The gold and stock markets both prefer lower rates to higher rates. Any signs that the Fed may complete the current tightening cycle sooner than anticipated or that it may not hike as far as previously expected could be bullish for both asset classes. Any signals to the contrast could be trouble for the bulls, however, and could lead to sharp declines in both gold and equity markets.