The gold market is down today and down sharply. A sharply higher dollar index is taking a big toll on the yellow metal today as the currency hits a 20-year high. Not only that, but deteriorating technicals have put the market into a “sell the rallies” mode that may see further selling of any upside while severely limiting gold’s ability to bounce back higher. Stocks are also getting kicked today as the benchmark Dow Jones Industrial Average is down nearly 500 points at mid-day.
Risk aversion within the markets remains elevated as the war in Ukraine shows no signs of slowing down any time soon. Not only that, but rampant inflation and Covid lockdowns in China are also adding stress to already-strained markets and supply chains. All three of these issues could put the U.S. and other nations into recession in the months ahead. The risk of recession is very high and could not come at a worse time. As the Fed looks to normalize monetary policy and inflation through aggressive tightening, any moves by the Fed may add additional pressure to markets and could cause investors to exit en masse. Markets could already be seeing a widespread exit by investors as the economy cools and an aggressive Fed may only exacerbate that problem.
The release of the Producer Price Index today will not do much to cool inflation concerns. PPI came in at a reading of up .5%, in line with expectations. The PPI reading may, in fact, lead some to believe that inflation has or is close to peaking. That notion is not, however, being reflected in market action thus far today. Gold is being hit hard, with spot prices down over $30 per ounce. The current price of gold is around $1823, well below key support at $1850. The bears will now look to put even more distance between prices and $1850. A breakdown and close below the $1800 could pave the way for the bears to take prices sharply lower and to do so quickly. The bulls will continue to fight, however, and a steep decline in the metal may not come easily. That being said, however, the bulls have a lot of work to do to get the market back into an offensive state of mind. The bulls must first produce a close above $1850 and then $1900 to get things going.
Today’s inflation data was close to expectations. One has to wonder, though, just how fast any declines could be seen in inflation if it has in fact peeked. The data does not suggest any let up in pipeline inflation pressures and therefore price pressures could spill over into CPI data for the next several months. As they do, the Federal Reserve may become increasingly aggressive and could hike rates even more than they have previously let on. An aggressive Fed does not necessarily mean weaker gold, however, and the yellow metal could even stage a sharp recovery from recent selling if the Federal Reserve gets inflation under control in the months ahead.