The gold market is moving modestly higher in mid-morning trade Monday as the new trading week gets going. Spot prices are up almost $7 per ounce putting the yellow metal at $1790 and change. Despite some recent upside, the gold market has lacked any sustainable follow through on rallies or breakdowns in recent months. This has many investors likely asking themselves what it may take for the metals to actually break out and sustain a move either up or down.
The answer to that question may lie in the Fed and what the central bank does or does not do in the months ahead. The primary worry for metals investors has thus far been one related to whether the Fed will be forced to act quickly and aggressively to reign in overheating inflation. The possibility of the Fed doing so, while technically possible, seems extremely unlikely. The Fed is very tentative, and with mounting political pressure to focus on the employment side of its mandate, it could continue to maintain a very easy money stance for several more months or longer whether it pulls back on QE or not.
If rising inflation is not the determining factor for the Fed, what else may fuel gold to surpass previous all-time highs and to make a sustained run higher that may attract more investment? The answer to that question may lie in gold’s value. Compared to stocks, real estate and other risk assets, gold has not had the run up that they have and thus may be considered to be undervalued at current levels. Of course, investors would have the voice of putting capital to work in stocks, for example, but why would they choose asset classes that some already feel are extremely overvalued and unlikely to provide much of a return in the years ahead?
The day of reckoning for investors will arrive and it will come in the coming months. When that day arrives, they will likely feel far more comfortable about the Fed and its inability to aggressively tighten monetary policy. If GDP data were to also trend slightly lower during that time, what reason would the central bank have to tighten aggressively anyway? Likely none-and that could fuel gold to all-time highs or far beyond in the months and years ahead.
As the market has maintained its recent trading range, the bulls still have control of the market on the daily chart. The bulls’ control is tedious, however, and fresh strength will need to be shown soon in order to keep the bears at bay. The mid 1830s remains the next key target for the bulls to take out on a closing basis, while the bears will look to make price decline below support at $1750. The longer prices hang around this general congestion zone, the more likely the bears will catch a break and the market may reverse course. Weak economic data and/ or a weaker dollar may be what the market is looking for in order to breakout and rally higher.