The gold market is seeing some solid selling pressure in early Monday action. Bearish outside markets are likely a factor as the dollar is higher and crude oil is lower. With little economic data out today, investors may focus on outside market action to make decisions in metals.
The next several sessions could be critical for gold, as the bulls and bears are now on a level playing field from a technical standpoint. As the next wave of momentum may be determined this week or next, market participants will be on the lookout for any clues about key issues such as monetary policy or inflation.
The Federal Reserve has been dropping some significant hints it could elect to begin tapering much sooner than expected. Despite the central bank hinting at tapering, however, many have serious doubts the Fed will begin this year. More than likely, the central bank could begin tapering its mortgage-backed security purchases of $40 billion per month next February or March. The Fed is likely to continue to buy assets on a monthly basis, albeit at a slowing pace, until some time next year. The potential for the Fed to reverse course and do so has not yet stung the gold market. It has the potential to do so, however, and may act as a form of upside resistance in the months ahead. It appears the Fed is attempting to avoid a repeat of the “taper tantrum” seen several years ago during a similar situation.
The Fed will make its decision on the economy and how things continue to respond in the post-pandemic era. The recent pace of new job growth has been arguably strong, although there have been some bumps in the road. The recent spur of higher inflation is currently thought to be transitory. As of right now, the Fed does not appear to be overly concerned about rising price pressures and seems to have no plans to speed up its tapering due to inflation. That could change quickly, however, if key inflation metrics rise further.
The gold market may need to bide its time for an extended period. As market participants look to the Fed for clues about its intentions, there is likely to be considerable confusion that comes along the way as well. While this may prevent a total collapse in the gold market, it is not likely to fuel any major upside, either. For now, the bulls will be forced to hang their hats on rising debt, inflation, easy money policies and the potential for a stock reversal.
Fed Chairman Jerome Powell is scheduled to testify this Wednesday in his semi-annual monetary policy testimony to Congress. Powell could very well provide strong evidence that the Fed could announce a tapering soon, setting the stage for a long runway of asset purchase tapering that could begin as soon as this year. Some analysts, however, believe it to be very unlikely that any global central banks turn more hawkish in the near-term. The ongoing viral pandemic, weaker economic data and other factors could all keep central banks standing pat for the time being. Such a scenario could be viewed as bullish for gold, although the market may now require a fresh bullish catalyst to make the jump higher and challenge previous all-time highs.