Days after hitting the $1800 level, the gold bulls are still struggling to maintain some upside momentum. Spot gold is down today by a few dollars per ounce as bearish outside market action takes place. The higher dollar and lower crude oil are having a bearish impact on gold as well as stocks hitting multi-month highs in recent action.
Despite gold’s weakness in early action this week, the bulls are still within easy striking distance of the $1800 level. A close above this level could attract a fresh wave of buyers that could take prices higher and do so quickly. A failure at this area once again, however, could be a bearish omen. If the bulls are unable to stabilize things around current levels and force a test of $1800 on a closing basis, the bears may seize further control of the market. The recent uptrend has already been negated, and the bears remain in control on the daily chart.
Concerns about a possible recession remain robust. This week, China released several key data points that were all weaker-than-expected. A miss in real estate, factory output, investment and more has driven the Central Bank of China to lower interest rates to boost the economy. China has the world’s second-largest economy, and if it begins to take an increasingly dovish approach to policy, other nations are likely to listen. The Chinese easing comes at a time when the U.S. and other nations are trying to tighten rates.
It will be several more weeks before markets know if the Chinese easing has influenced the U.S. Federal Reserve. The FOMC meeting will take place next month. The Fed has another month or so worth of data to scrutinize, therefore, and could elect to take a pause or hike rates less aggressively come September. Whatever the Fed decides to do or not do is likely to have a major impact on global financial markets in the months ahead.
As the next Fed meeting is awaited, the battle over inflation rages on. Last week’s CPI and PPI data were both under headline expectations. The weaker headline data does not, however, necessarily point to weakening price pressures. The core rate of inflation remains very, very high. The decline in headline inflation figures may simply be due to the drop in gasoline prices seen in recent weeks.
Inflation may have already become entrenched. If the Fed is unwilling to take rates as high as may be necessary to slow it, the battle over inflation may already be lost. If price pressures are to remain, to some degree, gold and other hard assets could stand to benefit. The long-term bullish case for gold remains unchanged, investors simply need to see the “forest through the trees” to take advantage of what may currently be fire-sale prices in gold. Once the bulls take over, current price levels may never be seen again as the market could quickly race to previous all-time highs or well beyond.