A Sluggish Start

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The gold market kicked off the new trading week on a sluggish note, declining by some $22 per ounce in late afternoon trade. The yellow metal was likely falling victim to chart based selling that gave investors reason to hit the sell button. Of particular note Monday was gold and silver’s ignorance of a risk-off scenario in the markets. The failure of the metals to catch a bid in early action Monday could be a warning signal to bulls and may suggest that additional bearish pressure could be on the horizon.

The story of the day is the margin calls being experienced by Archegos Capital Management. The firm reportedly dumped some $30 billion in holdings late last week and that move could have been due to being overleveraged. The major concern was for the potential of contagion in the markets. Thus far, however, markets have shown little interest in the scenario and any contagion effect appears to be limited, if existing at all.

That could change, however, and any signs of market contagion have the potential to light a fire under gold and silver. Worries over a more damaging effect could send bids into the precious metals space immediately as investors look to escape the potential carnage.

In other news, investors are looking forward to the Biden Administration’s release of its next economic plans, due to be unveiled Wednesday. The first of two sections of the administration’s agenda, the proposal could reportedly cost several trillion dollars and may also include a substantial amount of new tax revenues. It is unclear what effect, if any, the proposal may have on the metals markets. Any significant uptick in spending without the means to pay for that spending could pressure the dollar and drive buying in the metals as a hedge, however.

A big plus for the gold market in recent years has been the global move away from the U.S. Dollar. That move appears to be ongoing. The Russian National Wealth Fund recently announced its intention to move into gold. The move likely has something to do with Russia’s de-dollarization efforts which have been ongoing for several years now. The Russian central bank stated in January that its gold holdings had finally surpassed its dollar holdings. The central bank has reportedly purchased over 200 tonnes of gold on average per year since 2014 with the exception of last year’s smaller total.

The dollar did, however, hit a four-month high today as worries over the hedge fund default took hold. The Dollar Index is now at the highest level since November 2020 and could potentially be poised for further upside. Any additional gains may weigh on the gold market, while a reversal lower could set the stage for stronger gold and metals prices. With today’s poor showing, the bears are again in control on the daily chart and may look to expand the downtrend that has been in place several weeks now.

Bond Yields, Cryptos, and Gold

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The gold market is off to a slow start Monday morning. Stable bond yields and stronger stocks are both taking a toll on the yellow metal which is down over $7 per ounce in early action. Some fresh chart based selling is also being seen today as the bears look to build upon their current technical advantage on the daily chart.

 

This week, investors are likely to remain focused on bond yields and may also pay attention to economic data set for release. The gold bulls may be on the lookout for any weaker than expected data or other issues that could point to the Fed keeping its foot on the gas pedal. The central bank did recently reiterate its views on rates, stating that it would hold rates steady around current levels for some time to come, despite the threat of rising inflation. The central bank’s credibility is always in question, however, and investors would likely feel better seeing more reasons for the Fed to hold rates steady.

 

Amid rising bond yields, an economy that is recovering and a very accommodating Federal Reserve, the rise in Bitcoin and cryptocurrencies is also becoming the subject of more speculation and discussion. Bitcoin is valued today at nearly $60,000 per unit. As its price grows, so seemingly does the interest in the currency.

 

Fed Chairman Jerome Powell is discussing cryptocurrencies today, suggesting that the asset class is “substitute for gold, not U.S. Dollar.” Several leading global central banks have, in fact, suggested that they are not threatened by cryptocurrencies at all. The crypto market volatility seems to be a major stepping stone for these currencies to become more widely used and accepted, and that volatility does not appear ready to subside any time soon. Despite cryptocurrency drawbacks, however, this market may continue to compete with gold and other asset classes as a store of value and protector of wealth.

 

A further rise in cryptocurrency prices may keep any rallies in gold limited. Despite any potential rise in currency values, however, the gold market still has numerous reasons to move higher. The combination of easy monetary policies, rising inflationary pressures and dollar weakness could all keep a bid going in the gold market for the foreseeable future. A sudden dollar reversal or change to monetary policies could, however, deflate interest in gold and cause a fresh wave of selling to enter the market, taking prices lower in the process.

 

The bears still have the technical advantage on the daily chart and will look to build momentum with further downside. The nine-week old downtrend on the daily chart was negated last week, however, and the bulls could have the potential for a market reversal in the days ahead. The bulls will need to take out key resistance in the $1775 area before getting overly excited and could target the $1800 region in the days ahead. On the downside, the bears will target the March lows around $1673. A breakdown below this level, on a closing basis, could set the stage for a fresh wave of selling that could potentially see prices hit sub-$1600 levels.

The Fed Has Spoken

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The U.S. Federal Reserve made no changes to monetary policy today as expected. The central bank did, however, increase both its growth and inflation outlooks. The Fed reiterated that interest rates are not going anywhere anytime soon, and that no increases will be seen prior to the end of 2023.

 

The potential for rates to remain at zero for another couple of years has injected buying interest in the yellow metal today, and gold has now pushed into positive territory following the Fed announcement. Although the Fed has suggested that growth and inflation are likely to pick up more steam, it also cited some key issues that could potentially pit a damper on things going forward. The Fed cited the ongoing viral pandemic as a major contributor to overall economic activity and said that it poses a major risk to the economic outlook.

 

The rate of inflation forecast by the Fed may now exceed its desired 2% annual target. Recent projections suggest that price pressures could rise by as much as 2.4% by the end of the year before falling back towards 2%. The rapid rise in inflationary pressure could keep gold and other hard assets well supported in the months ahead, despite the potential for strong equity market performance.

 

The Fed appears ready and willing to follow through on its previously discussed plans to allow inflation to run a bit “hot” before raising rates to slow things down. The notion of ultra-low rates with a weaker dollar and massive stimulus spending may give more investors reason to consider gold in the near future, especially in the face of rising inflation.

 

Fed Chairman Jerome Powell will be giving a news conference following today’s decision on interest rates. No major surprises are expected, and Powell is likely to continue to telegraph the fact that the economic recovery remains far below the pace necessary for the central bank to consider any changes to policy. Powell may even forcefully argue that any ideas of a rate hike are premature as he looks to lay out the central banks plans and thinking to the investing public.

 

The U.S. Dollar Index has lost ground after the announcement. The dollar weakening could be a sign of more downside to come. Further dollar weakness could pave the way for sharply higher gold, silver and metals prices. With no rate increases likely being seen unti at least 2024, it is difficult to imagine a scenario in which the dollar strengthens dramatically from recent levels. A downtrend in the dollar could keep upwards pressure on the gold market while providing key support for the yellow metal.

 

The bears still maintain control of the market on the daily chart. The bulls will likely make a push towards resistance in the $1750 area this week, and a breakout above this area could set the stage for a further rally. The Fed has apparently set the table for higher gold prices in the months ahead. Dinner may now be on the way.

Under Pressure Again

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The gold market is under pressure Monday as the new trading week gets underway. The yellow metal is seeing some selling enter the market as it is forced to compete with other asset classes. Rising bond yields coupled with a stronger U.S. Dollar Index is giving investors pause and a reason to hit the “sell” button today.

 

The benchmark U.S. 10-year note is yielding around 1.62% early Monday afternoon. This key treasury contract has been seeing a steady climb in its yield. That ascension has investors worried, and higher yields may not only negatively affect the price of gold but may also have a bearish influence on stocks. Although the current currency yield itself may not be a cause for concern, the steep uptrend in yields could be indicative of rising inflationary pressures or worries about the Federal Reserve’s plans going forward. Whatever the case may be, treasury yields are worth watching and gold investors will likely pay close attention to yields in the weeks and months ahead.

 

The dollar has hit a 3.5 month high and has been trending higher in recent action as well. Currently sitting at 92 and change, the Dollar Index could potentially make its way towards the 94 region before finding more serious selling pressure. The greenback is currently benefiting from stock weakness and the recent passage of Biden’s $1.9 trillion stimulus package.

 

Geopolitical risks may be on the rise, however, and have the potential to provide a much needed boost for gold and metals. Over the weekend, Houthi rebels staged a drone attack on Saudi Arabian oil facilities that led to a rise in crude. The oil market hit over $67 per barrel before backing off on profit taking. The situation is also likely to be closely monitored by global investors, as any further escalation has the potential to affect global oil supplies running out of the Persian Gulf region.

 

Recent Chinese economic data would seemingly suggest that the globe’s second-largest economy is running at full speed. Overnight, China reported that both imports and exports rose sharply above expectations. Further positive economic news from China may keep gold supported as it could be indicative of stronger metals demand from China.

 

The gold market is in a downtrend on the daily chart and prices stooped to a 10-month low today. The question now becomes how much lower might they go? The $1600 may seem like a far ways off, but the market could reach that price point within days. Strong technical support in the region could keep the yellow metal from falling any further, however, and the bulls could become increasingly aggressive on any moves lower. The bulls, on the other hand, will likely target resistance in the $1750 area as a first step. The market is really in no man’s land at current levels and the next several sessions could dictate whether the bulls or bears control the metal for the foreseeable future.

Is Inflation Really A Problem?

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The idea of rising inflationary pressures has taken a large chunk of market attention in recent months. At first glance, the threat of inflation seemingly makes sense. Rising bond yields, higher crude oil prices and other factors have fed the notion that a period of rapid inflation could be on the way.

 

The idea of entering an inflationary environment comes at a time when the Federal Reserve is looking at adding additional stimulus measures to battle the ongoing COVID-19 pandemic. The idea of further government spending to help Americans hurting from the pandemic has some analysts concerned that too much free money floating around is likely to add fuel to the inflationary fire and boost prices.

 

Not only have rising price pressures, such as that seen in crude oil, pressured inflationary worries to the upside, but the rapid rise in key treasury product yields has also served to give investors cause for concern. The benchmark 10-year note yield, for example, has quickly risen from sub-1% levels to its current level around 1.5%. This move higher did not happen overnight, however it did seem to take place quickly and would seemingly suggest that higher prices could be on the way.

 

Fed Chairman Jerome Powell threw some needed water on the fire today as he spoke at the Wall Street Journal Jobs Summit. Powell suggested that while prices have been on the rise, that rise is transitory and is likely a one-time event. The central bank’s long-term inflation objective remains at 2%, and currently inflation is running well below that level. The Fed has also reiterated several times that it plans on allowing inflation to run a bit hot before it even considers removing accommodation.

 

Powell’s commentary today could be viewed in one of two lights for gold. Some may view the idea of a lack of inflation as allowing the Fed to keep rates ultra-low for longer. Others may view it as being bearish for gold as it suggests that the Fed has still been unable to make any significant economic changes.

 

The gold bears seemed to have the upper hand today, as gold declined below the key $1700 level following his comments. The drop below this area could potentially set the stage for a larger decline as it may draw bulls out of the market, causing them to effectively throw in the towel. Today’s declines in gold come shortly after the “taper tantrum” of late February fueled selling in bullion that took prices down over $114 per ounce for the month.

 

The reality, however, is that the Fed can only do one of two things going forward: It can begin to taper (which could drive yields up substantially in a short period of time) or it can stay the course. Given the risks associated with a rapid, large rise in rates, the Fed will almost certainly do nothing for some time. This should allow the bullish gold narrative to remain intact despite some bumps and bruises.

Gold verse the Dollar

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The gold market is seeing some buyers step in this week as the Dollar Index comes under renewed pressure. In addition to the weaker dollar on Tuesday, gold also likely got a bounce higher from stronger crude oil which traded over $60 per barrel Tuesday.

 

The gold market has continued to hold off recent selling pressure, however, it remains unclear how long the market may be able to stem the tide of willing sellers. After hitting a nine-month low overnight, the gold market saw a mild corrective bounce higher. The yellow metal has been hampered of late, as dollar weakness has subsided and as stock markets have continued to march higher. The benchmark 10-year U.S. Treasury yield now stands around 1.44%. A slight decline in yields sent stocks roaring higher on Monday, although many analysts seemingly believe the recent ascent in yields could continue.

 

The topic of potential inflation has been a mainstay in financial media for weeks now. Overnight, data from the Euro Zone showed an inflation reading of up .9% after a January reading of .9% higher. Although inflation has seen a slight climb according to some key data points, it remains quite far from the levels associated with being problematic. Inflation data later in the year may become more telling, as it would paint a better picture of global economies that are starting to run hot.

 

The Fed is also likely to continue to play a key role in gold’s fortunes. The central bank recently suggested that it plans on keeping its easy money policies in place, despite the potential for an inflationary battle. The recent rise in yields was seeming to suggest the Fed could begin to tighten sooner than expected. The Fed has, however, quelled that notion as it looks to get more Americans back to work. The labor market may hold the key to when the Fed reverses course, and the central bank is likely to take extra caution before tightening too soon in order to make sure as many Americans benefit as possible. Inflation is still running below the Fed’s desired 2% annual target as well, and the Fed will likely want to see inflation run at or above 2% for a period of time before it starts to tighten policy. The idea of an accommodating central bank may keep the gold market and other hard assets in play for the foreseeable future.

 

Make no mistake, however, the gold bulls do have their work cut out for them. The market remains dangerously close to near-term support. A breach below recent support could set the stage for a significant leg lower that has the potential to wipe out any bullishness in one swift stroke. A breakdown below the $1700 could trigger a large wave of selling that could drag the market sharply lower.

 

The bulls on the other hand, have their eyes set on a close above the $1800 level. A solid close above this area could fuel further buying interest in the market as traders and momentum players look to jump on the bandwagon.