The gold market is seeing some degree of volatility as the new trading week gets underway. The yellow metal has seen a rapid reversal in mid-morning trade today. After being down several dollars per ounce, the market has now sprung higher with spot prices rising by some $7 per ounce.
The earlier downside in the market is likely due to a deteriorating chart situation. The short-term technical posture of the market has encouraged short-term futures traders to play the short side. As long as this remains the case, the market will remain vulnerable to selling fits that could drag prices down towards the $1700 level or lower. The bulls, on the other hand, will attempt to take the market firmly back above prior resistance at the $1800 level.
The yellow metal is quite likely in a holding pattern of sorts, however, until the latest non-farm payrolls data is released. Set for release on Friday, the jobs report could set the stage for an increasingly aggressive Federal Reserve to begin tapering its monthly asset purchases. If the Fed does begin to cut its monthly security purchases, it could have a bearish effect on the gold market. A rising dollar and higher bond yields could make life very difficult for the gold bulls if the period of easy money comes to an end. Although the central bank has suggested that it would taper until all of its purchases are over before touching interest rates, it has become increasingly likely in recent weeks that the Fed could look to hike rates as soon as next year.
Despite the threat of ongoing inflation, an increasingly hawkish Fed and other bearish factors, the gold market still has reason to shine. Fears over Chinese company Evergrande and its effect on the global economy may keep a safe haven bid in the marketplace. Higher energy prices could also weigh on the global economy and may also keep buyers alive and well in the gold market. The debt ceiling issue is another major potential roadblock for markets. If the ceiling is not raised, in time, the U.S. could default for the first time in history. A default by the country could send borrowing costs sharply higher and could even out the nation back into recession.
The bears are in control on the daily chart and will try to maintain that control for more than a few days. The market is in the midst of a downturn that began about a month ago. The bears have little to show for their efforts thus far, however, and could become increasingly frustrated if prices do not decline further in the days ahead. This could make the market also vulnerable to a short covering rally. Such a rally could be powerful in nature and could take prices rapidly higher, attracting fresh longs along the way.
At the end of the day, gold investors and traders may need to show patience as the market works out where it belongs. The Fed may not be trusted by the public at this point either, and it may take actual action from the central bank to have a significant and lasting impact on the gold market.