The gold market has seen a nice bounce in recent action, recovering much of the losses seen in recent weeks. The gold market tested the $1200 per ounce level, and found willing buyers. Now around the $1230 level, the gold market is about $35 per ounce from its recent highs.
Perhaps the gold bulls should be thanking the Fed. After a significant amount of more hawkish rhetoric from the Fed, the central bank this past week struck a different tone. The central bank did raise the Fed Funds rate by a quarter point in a move that was totally expected. What may have caught some investors off-guard, however, was the dovish tone surrounding the announcement on monetary policy.
After data showing rising inflationary pressures and a strong labor market, Fed officials began talking up rate hikes, essentially letting markets know that a March hike was coming. Numerous central bank officials have commented in recent weeks on the outlook for rates and the economy, and it left the impression that there was a good possibility that the central bank could become more aggressive with rates as it looks to normalize monetary policy.
Last week, however, the Fed stuck to its previous forecast of three rate hikes in 2017 and three in 2018. Although the Fed has said that the Trump administration’s plans do not factor into its decision (at least not directly), it does seem as if the central bank is interested in seeing what effect any potential tax reforms and fiscal spending may have on the economy.
The slow and steady approach towards tightening reiterated by the Fed seemed to be music to the ears of the gold bulls.
Lacking any fresh bullish catalyst, it remains unclear how high gold may go from current levels. Gold may see ongoing interest if inflationary pressures continue to gather steam. As long as equities continue higher, however, the gold market may see only limited upside.
Stocks have moved higher on the notion of significant tax cuts and fiscal spending, although neither of these policies has been implemented yet. Investors have been patient thus far, but it remains to be seen just how far that patience will go.
Some might argue that the bull market in stocks is getting very long in the tooth, and that the chances of a recession are increasing. If the stock market begins to falter, it could potentially keep the Fed less motivated to hike rates while also fueling capital flows into alternative asset classes.
A major stock market breakdown could potentially be like throwing gasoline on a smoldering campfire, and could see the price of gold move significantly higher from current levels.
Gold may also see support from ongoing geopolitical risks. The Trump administration has had its share of controversy already, and it seems that the administration is always one misstep away from a major international incident.
The administration could make or break the markets in the coming months. A massive fiscal spending package may fuel growth and inflation and send stocks even higher. If the administration is not able to deliver, however, markets could head sharply south in a hurry.
Gold may potentially find itself in a position to benefit either way.