Prospects of War
The gold bulls are out in force Monday as spot prices have risen above key resistance. Gold is now sitting around $1865 in late morning trade and appears ready to close above the $1850 level. Today’s strong showing may pave the way for further gains in the week ahead and may also entice short-term momentum traders to jump on board. A mix of geopolitical and inflation jitters is the fuel for the fire today and may continue to act as such in the weeks and months ahead.
The trading week started off on a risk-off mentality this morning as stock markets opened under pressure. Not only are investors concerned about inflation hitting a 40-year high, but they are also watching geopolitical developments across the pond. Russia appears ready to invade Ukraine any day now, and if it does, it is unclear how the United States might react. The U.S. could simply slap more sanctions on Russia or could counter with a full-blown ground war. The unknowns surrounding Ukraine are a source of market tension right now and may boil over if Russia does in fact invade the nation.
With no major economic news due for release today, markets are paying close attention to the bigger picture. Crude oil, the dollar and the 10-Year Note yield are all higher today, furthering concerns over inflation. Investors may have more to worry about tomorrow concerning price pressures, as the latest data on producer prices is set for release Tuesday. A hot PPI reading could cause dramatic volatility and selling in the days ahead. Any reading over the expected rise of .5% is likely to be viewed as extremely inflationary and could even cause the Federal Reserve to take emergency action before the expected rate hike in March.
Gold hit a three-month high today and could be poised for more gains in the days ahead. With key resistance now breached at $1850, the market may find little standing in the way of a return to previous all-time highs or beyond. Of course, gold’s fortunes over the next several months and years may depend on several key factors, including the Fed’s monetary policy decisions and geopolitics. Currently, the market is seemingly in a bullish position. Even if the Fed does hike rates harder or faster than expected, the gold market may continue its ascent if inflation remains problematic. Not only that, but gold has risen during previous tightening cycles and there is no reason to believe it won’t do the same during this cycle. The $1882 area (November high) is likely the next level to test for the bulls. The bears will look to take the process back down to below $1800 as a starting point. Price action between these two areas is likely just noise but could exist for some time. Until a breakout does develop, bargain hunters may step in to buy any significant dips in price.