The gold market is slightly lower in mid-day action Wednesday as short-term traders continue to book profits. Not helping the bulls either is the stronger dollar today and crude oil having backed off its high from earlier in the session. It has been a busy day for economic data, with the latest readings on the Producer Price Index and retail sales both being released. The Producer Price Index was probably the most heavily watched report of the day. It showed inflation easing further, coming in at up 6.2% year-over-year. That was significantly lower than the November report, which showed a rise of 7.3%. It was drastically lower than the March 2022 report which showed a rise of 11.7%. While inflation is still very high and nowhere near the Fed’s desired 2% annual target, it is declining steadily in recent months.
The softer inflation data may mean the Fed has done some things right and that its rate hikes are having the desired impact. Much work remains to be done, however, and the Fed is likely to keep hiking rates albeit at a slower pace through the first half of the year. The next rate hike in a couple of weeks will likely see a rise of just 25 basis points compared to the 50 and 75 basis point hikes markets have become accustomed to in recent months. The Fed has said it feels rates may need to remain higher for longer, and it therefore may take a slower approach to get rates to the needed levels.
The gold market may remain quite vulnerable to the Fed and any changes it makes in its policy objectives. Further rate hikes appear to be priced into the market already. A surprise larger-than-expected rate hike could throw the bulls off track, however, at least temporarily. Should the Fed elect to quit raising rates or even signal a pending rate reversal, the gold market could skyrocket higher. In the meantime, the trend for gold remains on the upside and that is the path of least resistance. The bulls have held the $1900 level so far Wednesday and their next target is resistance at the $1950 area. The bears need to produce a close below $1800 before getting excited. Until proven otherwise, any significant dips in gold are likely to be aggressively bought.
The gold market may find itself staying sideways to slightly higher over the next few months until more is known about the Fed’s plans. Of course, any major inflation data changes could also impact the yellow metal in the meantime. If the bulls can take out the $1950 level on the topside, the metal could be well-positioned to challenge previous all-time highs. A failure to take this level out could be indicative of the rally running out of steam and the market possibly reversing course. Given the current economic and geopolitical landscapes, a reversal seems very unlikely.