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The gold market is slightly higher in early afternoon action after having a lackluster day session. Spot prices are currently up nearly $3 per ounce as some short covering is featured. The dollar index remaining around a 20-year high is also not helping gold much as yields are also elevated.

The gold market may now be in a danger zone of sorts as it approaches the $1800 level. A downside breach of this area on a closing basis could set the stage for a fresh and significant leg lower in price that could take the metal all the way down towards the $1700 level before finding some support. The bulls have hung in today, however, and have been buying on moves towards the $1800 level. Whether that remains the case in the days ahead is still an important question. Any further selling pressure could cause more bulls to throw in the towel and that could lead to an aggressive downswing.

There are several major issues plaguing the gold market currently. Overall, markets are paying very close attention to the inflation narrative, the war in Ukraine and the Federal Reserve. There have not been any major new developments in the Ukraine war in some time now, and there has also been no signs of the conflict slowing down. As long as the war rages on, supply chain bottlenecks may persist and some degree of risk aversion may also remain at play.

The inflation situation remains very poor, with some now wondering if inflation has peaked. It is too early to tell if price pressures have peaked, although they remain robust and a negative for equities and risk assets. The Fed has suggested that it will fight inflation aggressively, using all of the tolls at its disposal. Whether that proves to be the case remains unclear. Aggressive rate hikes or other tightening actions are likely to fuel more selling in stocks and risk assets. This selling and heightened volatility may eventually lead to some serious pressure being put on the Fed to keep its foot on the gas pedal. The Fed must stay the course, however, to effectively battle inflation. If the Fed changes course, markets may find themselves in the worst case position of rampant inflation with little to no growth or even a recession.

The gold market will also watch the Dollar Index closely in the weeks ahead. The currency is now sitting around a 20-year high and has proven to be a formidable enemy of higher gold. Dollar strength makes gold relatively more expensive for foreign buyers while dollar weakness makes it cheaper. Gold’s tendency to move inversely of the dollar is based on this relationship. Any dollar weakness in the weeks ahead could be a major bullish factor for gold and could reignite the bulls’ enthusiasm.

The market is on shaky technical ground with the bears having an edge. Until it breaks out above or below key support or resistance levels, however, the market is in no man’s land. The next breakout could, however, set the time for months to come.