The gold market is picking up this week where it left off last and is moving solidly higher in early Monday action. Spot gold prices are up by over $11 per ounce in early trade and could see more buying as the day progresses.
The upside breakout seen in gold last week has given the bulls some fresh ammunition with which to work. Now trading around $1842 per ounce, the market has quickly put significant distance between itself and previous resistance at the $1800 level. The upside breakaway is likely to attract further buying interest as prices rise. Momentum and short-term traders may jump into the market to capitalize on bullish prie movement while the bears are forced to cover short positions, also driving prices higher as a short covering rally also takes place.
The Federal Reserve may now find itself in a very challenging position. Despite a recent uptick in inflationary price pressures, markets have yet to demonstrate that they will be open to accepting higher interest rates. Higher treasury yields have actually been the primary driver behind several market sell-offs in recent months, and a move towards higher rates by the central bank could act as the mechanism behind a major market sell-off or reversal.
The Fed has acknowledged the possibility of hotter inflation and appears willing to let prices run higher for a period of time before taking action. If the central bank does not want to fall behind the curve, however, it may need to act sooner than many anticipate. If the Fed does take action, or even discusses the possibility of action, the markets may react in a fashion similar to that seen several years ago during the “taper tantrum.”
When the U.S. previously announced a reduction in the pace of its bond purchases, yields quickly soared on the news as investors were quick to sell treasuries, forcing yields higher.
In its quest to boost and support the economy as it recovers from the ongoing viral pandemic, the Fed has perhaps set itself up for a major market shock that could affect treasury, credit and equity markets. A crash in these sectors could not only weaken the economy, but could put the economy back into a stall mode, forcing the Fed to come up with alternative ways to support activity.
Treasury Secretary Janet Yellen last week announced her concern over rising inflation and suggested that the Fed may have to act to prevent an overshoot. Yellen’s remarks sent markets tumbling, and once the damage was seen she was quick to retract her comments by suggesting her opinion that inflation will not become a significant problem.
The concerns over inflation and the Fed are not likely to diminish anytime soon and may increase further in the months ahead. The combination of rising price pressures with increasing stimulus could keep the inflation hawks on the lookout while pressuring the Fed to act sooner rather than later. An increasingly hawkish Fed may keep the gold bulls at bay while a dovish Fed is likely to fuel further gold upside in the months ahead.