The gold market is higher again today as bullish momentum continues to build. Prices hit a nearly four-week high today as increased risk aversion and keener safe haven demand fuel buying. Spot gold is rapidly approaching the $1800 level at which a key technical level could be taken out. If the bulls are able to produce a close above $1800 in the days ahead, the yellow metal could quickly work its way higher. The next key stop for gold could then be the $1900 level.
Among other sources of market tension, U.S./Chinese relations are being strained today as Nancy Pelosi is set to visit Taiwan today. China has previously said there would be retaliation if she did visit Taiwan, but that apparently has not scared Pelosi into postponing or canceling her travel plans. Pelosi may be the first U.S. elected official to set foot on Taiwanese soil in over two decades. Her visit comes at an interesting time. Talk of a Chinese invasion of Taiwan has been on the rise in recent months. The Russian invasion of Ukraine has sounded alarm bells all over the globe, and concerns over a Chinese takeover of Taiwan are on the rise.
The economic data calendar is light today and markets may focus their attention elsewhere. In addition to worries over the Pelosi visit, investors may also be left to wonder about the Fed and its plans for policy going forward. The FOMC meeting of last week did little to provide investors with clues about the central bank’s plans. Fed Chairman Powell suggested the Fed would leave the door open for September. The Fed could continue its aggressive rate hikes at that time, if data warrants. It could also choose to hit the pause button or to even possibly reverse course and begin lowering rates again. The Fed has said it will rely on the data stream to determine if rates need to go higher, and if so, at what speed.
The almost two month time period until the next FOMC meeting will give the Fed plenty of data to scrutinize. Although inflation has shown some signs of having peaked already, such as weaker commodity prices across the board, the data stream still points to blistering hot inflation that is the highest it has been in four decades. Short of taking a Volcker style approach and ratcheting rates up to 20%, the Fed may have few weapons left with which to fight it. This could also pressure the Fed to start lowering again when the time comes. The real economic bite of the last couple of rate hikes has not even been felt yet. Once it is, however, the Fed could sing a very different tune.
Powell’s commentary last week may be the central bank trying to lay the groundwork for a move away from inflation fighting. If the economy slows much further or if a recession hits (if it has not already), the Fed could see fit to provide stimulus measures again and that means lower interest rates. In order to achieve any real progress, however, the Fed may need to tighten policy a bit further beforehand to achieve the desired effects.