The gold market is getting the new trading week off to a decent start. Some short covering and bargain hunting has lifted spot gold prices Monday by over $4 per ounce. While the day’s gains are nothing to write home about, they do put the bulls in position to again challenge resistance at the $1800 level. After breaking through that level recently, the bulls failed to extend the rally with a run through resistance in the $1850 area. Prices declined heavily in recent trade, sending the gold market back below the $1800 level and putting the bulls on notice.
Both gold and silver are oversold on a short-term basis. This condition could lead to further upside this week as the market figures out where it wants to go from here. Outside of the oversold condition, the bulls do still have some upside ammunition that could set the stage for a rally.
Inflation remains -and likely will remain for some time-a topic of great concern. The Fed has now acknowledged the problem that rising price pressures is posing, the question is what might it be able to do about it. After falling far behind the inflation curve, the central bank now has three rate hikes penciled in for the year ahead. With the first of those hikes likely taking place in March, the Fed could also hike further than anticipated or at a much faster pace. Whether the Fed hikes more than three times or ratchets up the pace of hikes, the effects will likely be the same. Stocks are likely to trend lower, possibly even seeing some heavy selling and heightened volatility along the way.
As the period of easy money is left behind, the markets will see new dynamics that could make not just this year very challenging but the next several years. The notion of lower equity markets combined with rising inflation is not a good mix, and investors may have little choice but to seek out viable alternatives. While cryptocurrencies such as Bitcoin could see renewed interest and upside, their volatility could keep any upside and investor interest somewhat limited. This could potentially leave gold as the only truly viable alternative asset class for investors to turn to. That demand has the potential to drive gold to new all-time highs and beyond and may keep any dips in the market insignificant over the long run.
As the Fed gears up to begin its policy tightening in the weeks ahead, markets may see an increasing wave of volatility. That volatility may also be driven by other factors as well, including the recent terrorist attacks on the UAE, higher crude oil prices and exceedingly hot inflationary data. This could keep the gold market in a sideways, range-bound type of framework for several weeks or longer. In the meantime, the bulls will keep their sights on the $1850 level, while the bears’ next downside target remains the $1775 level.