The gold market is under significant selling pressure again today as investors react to Wednesday’s release of the latest FOMC meeting minutes. The minutes were decidedly more hawkish in nature and suggested the Fed could start raising interest rates sooner than expected or more than expected. The market seemingly was caught off-guard and both stocks as well as gold were hit in the aftermath.
The minutes suggested that inflation concerns currently outweigh the economic risks presented by the Omicron variant. Fed Funds futures markets now point to a greater than 70% likelihood of a rate hike in March.
Despite the Fed minutes, the central bank will have to walk a very tight rope in order to accomplish its objectives. The Fed now seems very far behind the inflation curve and perhaps ready to take action. That action could, however, upset the economic balance and fuel a massive sell-off in stocks or an equity market reversal. Although the Fed will try to avoid rocking the boat as much as possible, it seems to now find itself backed into a corner from which there is no simple escape. As the Fed looks to normalize policy and quell inflationary pressures, it risks causing a significant economic slowdown or possibly even a recession. These risks may point to heightened volatility in the months ahead, an issue which could be bullish for gold and perceived safe haven asset classes.
Demand for physical metals remains strong despite some of the headwinds that may be on the horizon. The U.S. Mint recently reported that sales of its iconic American Gold Eagle coin were the strongest last year since 2009. The gold buying was not limited to seasoned investors, either, as new investors also got on board the gold train and started buying bullion.
The year ahead looks as if it might also see stringer bullion demand. As inflationary pressures mount further, investors may seek out gold’s perceived safety and wealth protection. If stocks do weaken based on higher interest rates, investors could also seek gold as a viable alternative that can offer protection not just from inflation but from a weaker dollar and geopolitical risks. Despite gold’s recent weakness and downside, the market has remained within its trading range and no significant damage has been done to the bullish case. That being said, however, the bulls will need to show some strength and show it soon or risk further selling pressure. The bears are targeting the $1775 level currently. A breakdown below this area on a closing basis could open the door to far more significant selling pressure that could see prices dip as low as $1600 before taking a pause.
The bulls will continue to look at resistance in the $1840 area as a next target. Given today’s slide, however, the bulls will first need to take the market back above the $1800 level on a closing basis before more momentum may be seen.