The gold market is seeing some shifts in expectations for the year ahead. Rising inflation, an increasingly aggressive Fed and other factors may all have significant effects on gold and could keep it on the defensive in the year ahead. The gold bulls did make some upside headway today, however, as they look to distance the market from key $1800 level. Spot prices are up nearly $6 per ounce in late afternoon action, now sitting at $1806 and change.
Market expectations for gold have seen some significant shifts in recent weeks as market dynamics have been changing. Scotiabank today lowered its gold forecast for 2022 to $1800 per ounce. The bank reportedly sees Fed tightening of monetary policy as a major hurdle to higher gold and believes that gold is likely to maintain its recent range throughout 2022.
Scotiabank’s Tuesday report highlighted the notion that the Fed is looking to hike more and faster than previously anticipated. Markets may now, in fact, be pricing in five rate hikes rather than the three the Fed currently has penciled in. The Fed has also set up plans to shrink its balance sheet as well and the combination of that and rising rates may keep the gold bulls limited.
Although rising interest rates may provide some headwinds for the gold bulls, the metal is unlikely to see a major price route this year. Problematic inflation is likely to keep a solid floor underneath the gold market as the year progresses, regardless of how high rates may get lifted. In addition to inflation, the bulls may also be able to rely on general market uncertainties and the potential for an equity market sell-off or reversal.
The downgraded forecast from Scotiabank may not be the last downgrade. More banks may decide to shift their market expectations as well in the weeks ahead. Of course, just how far the Fed may be willing to go remains unknown. The Fed has sounded considerably more hawkish in recent commentary. The Fed has sounded increasingly hawkish before, however, and elected not to act upon their hawkish rhetoric. If the Fed does not follow through on rate hikes this time around, however, inflation could spiral out of control and leave the Fed grasping for a solution. The Fed seems to understand it is already well behind the inflation curve and it does not appear willing to risk a major price ascent from current levels.
Despite some recent selling, the gold bulls still have control on the daily chart. That control could be considered quite fragile, however, and they will need to demonstrate further strength and do it soon to maintain that control. With the market back above the $1800 level, the bulls will again target a run towards resistance in the $1850 region. The bears will look to take prices back below the $1800 level and then try for a close below support at $1775. Whether the bulls or bears win the next round, it could potentially lead to an extended move in that direction.