Wednesday afternoon could see some fireworks this week as the FOMC meeting concludes. It is now widely expected that the Fed will raise interest rates again, but will hike rates by 50 rather than 25-basis points as it did in the previous meeting. This could only be the first of several meetings, in fact, where the central bank hikes by 50-basis points or even more. The Fed has seemingly acknowledged the real threat of inflation at this point after suggesting previously that price pressures were transitory and would abate on their own within time. After getting behind the eight ball quickly, the Fed may now be forced to attempt to catch up with aggressive policy measures. Although such a move may be necessary, it will not come without some pain. Stocks and risk assets could be hit hard by an aggressively-hiking Fed, and as capital ploys out of these assets it could be looking for a place to hide. Gold could stand to benefit because of this, and benefit handsomely.
Gold hit the $1850 support level in the overnight session today and has since staged a bit of a bounce back higher to current levels around $1872. Now that gold has touched this level, the question is whether it will be able to sustain a bounce higher again or if it will falter and retest this level on the downside. Given the anxiety over the FOMC meeting this week, a rapid run down to $1850 or even $1820 cannot be ruled out. Shorts may hit the sell button in a panic tomorrow based on the Fed’s actions or commentary and a knee-jerk reaction lower is very plausible. Conversely, a rapid move higher could also be seen depending on reaction to the Fed and could take prices back to the $1900 level or higher.
Expectations are wide for the Fed to hike by 50-basis points tomorrow and at its next couple of consecutive meetings. Even though rates may be going higher, however, the Fed could be unlikely to have a dramatic impact on the gold market. Real interest rates, after all, will remain negative. If stocks and risk assets sink further on an aggressive Fed, investors may have little place to go outside of gold to put capital to work in. Despite recent downside, the gold market has held some key support thus far as the bulls are willing to step in and buy. If that trend continues, it may simply be only a matter of time before the yellow metal stages an upside breakout that could see it challenge previous all-time highs.
The bears remain in control of the metal on the daily chart. The bears will look to take the market lower and produce a close below support at the $1850 level. The bulls will look to retake the $1900 level and then the $1950 level. A close above or below these levels could suggest a continuation and prices may keep going in that direction until exhausted.