Fed’s Hawkish Comments

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The gold market is seeing some corrective price bouncing following a recent sell-off that took the metal back below the $1800 level. As the ongoing market buzz continues to be worries over rising inflation, investors are still digesting last week’s more hawkish commentary from the Federal Reserve. The Fed’s hawkish comments were likely a main catalyst for the massive selling seen in gold last week.

 

Numerous markets and indicators are pointing to higher inflation down the road, although the benchmark 10-year treasury yield is not following suit today. The 10-year is now yielding 1.43%, a reading that is lower than the yield seen before the Fed’s remarks last week. Although the note may be giving investors a confusing clue, declining yields do not necessarily mean something is amiss. Yields could, in fact, continue their multi-week decline even if inflation continues to move higher.

 

In other pertinent news, the price of Bitcoin dropped by some 10% after China said that banks and payment institutions may not provide payment services for transactions involving cryptocurrencies. The latest move from China is seen as a big threat to Bitcoin and could keep any rallies under wraps as the currency looks to rebound from recent selling pressure that saw its value cut by nearly half.

 

The more that Bitcoin and other cryptos pull back, the better it may be for gold, however. The cryptos had been attaining a reputation as a store of value and competitor to gold in recent months. That competition may be anything but, however, after Bitcoin again demonstrated significant market volatility. Although Bitcoin and cryptos may feature some of the same positives as gold, they do not have the history nor the world recognition that gold has a store of value and protector of wealth. Gold has built such a reputation after hundreds of years of acting as such, while cryptos have only been around for a few years now. Gold may lack the upside price potential of cryptos, however, many who buy gold are not buying it for upside but rather as a hedge. This may make crypto’s upside potential irrelevant when compared to gold.

 

Despite Monday’s corrective price bounce in early am trade, the bears now have complete control of the daily price chart. Recent selling has seen proces decline well below the market’s 200-day moving average and the trend remains lower. Not only that, but prices have also dipped firmly below some key support levels, including the $1900 area. The bears may now target the $1700 level as their next conquest, while the bulls will need to first take out $1850. A close above $1850 could set the stage for the bulls to rechallenge the $1900 level.

 

Although gold was hit hard by the Federal Reserve commentary and hawkishness last week, the effects of that commentary are unlikely to last long-term. The Fed has not yet faced a real test, and the central bank may talk all it wants until such time as a test is faced. Last week’s commentary may prove to be nothing more than Fed “talk,” and the central bank may decide to stay the course in fear of upsetting the markets and fueling volatility.

Selling Pressure to Start

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The gold market is under some decent selling pressure Monday as a lack of risk aversion takes a toll on the bulls. The market may very well be running out of gas as some have suggested, although any significant dips in the price of gold may be viewed as a buying opportunity.

 

Recent data from the Commodity Futures Trading Commission (CFTC) suggests that hedge funds may be losing patience with the yellow metal. The metal’s failure to break out above the $1900 level on this run has likely fueled some profit taking among hedge funds and large market participants. This profit taking could take several days or more to work itself out, keeping the metal on the defensive for several sessions or longer.

 

Following multiple months of gains to the upside, the market may need some back and forth consolidation before being able to make a sustainable run higher above resistance at $1900. This consolidation period could be short as in a few days or it could go on for a significant period of time.

 

Despite gold’s lack of upside follow through in recent trade, it may be tough for traders and investors to bet on the short side. Rising inflation, a Fed happy to stand pat and other issues may all keep interest in gold on the bullish side of the ledger.

 

Data released today from the Federal Reserve suggests that inflation may become more of a long-term issue than the  central bank believes. Jerome Powell has suggested over and over that rising inflationary pressures are likely transitory as the economy continues to recover from the viral pandemic. The release of the Fed’s May consumer expectation survey today seemed to highlight the inflation threat, calling for a significant rise in prices over the next several years. That price rise, if seen, may keep bullish interest in gold elevated for the foreseeable future and may prevent the market from seeing any significant declines.

 

In addition to the threat of inflation, markets will also pay close attention to equities. The S&P 500 is just off a record high, and there appears to be little standing in the way of even higher stocks in the months ahead. A rising stock market may provide a roadblock to higher gold prices as investors chase equity returns and succumb to the fear of missing out. The higher the equity market climbs, however, the greater the eventual fall may be. Once stocks fall out of favor with investors, they may decide to put that capital to work in precious metals, fueling an eventual rise that could see gold move well beyond its existing all-time highs.

 

The key data point for this week will be the conclusion of the Fed meeting taking place Tuesday and Wednesday. The markets are not expecting anyweek ahead changes to policy at the end of this meeting. Investors will pay close attention, however, to the central bank’s commentary and outlook. The Fed has already suggested it may look to set a timetable for a reduction in its bond buying program (QE) and more could be announced concerning those plans on Wednesday.

 

The bulls still maintain control of gold on the daily chart, although that contro, is fading fast. The bullish camp will target a solid close above the $1900 level to attract more buyers, while the bears will look to take prices down to support in the $1810 region.

Vulnerable to Selling Pressure?

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The gold market started the trading week off on the right foot. Prices, however, were held below the key $1900 level as the bulls did not show enough force Monday to push past this resistance area. Although Monday saw bargain hunters step into the market to buy the dip, a lack of risk aversion may keep any gains limited and the market vulnerable to selling pressure.

 

Monday is a quiet day data-wise, but the markets will focus their attention on more data being released Tuesday and with the latest inflation data in the Consumer Price Index due for release Thursday. The topic of inflation has become a major market mover in recent months, and any surprises in this week’s data has the potential to send stocks sharply lower or higher. The consensus estimates for CPI are looking for a rise of .8% with a .4% rise in the core reading (minus food and energy). Any readings above these levels could send investors running for the exits and headed into perceived inflationary hedges such as gold bullion.

 

Recent data from the Commodity Futures Trading Commission (CFTC) showed that hedge funds and large market participants continue their bullish positioning in gold. The positive momentum may be weakening, however, as buying interest has dipped significantly since that seen in April and May. That weaker interest is likely due in no small part to the fact that prices are higher by over $200 per ounce. Much, if not all, of the initial buying demand may have now been met. This could leave the market in search of a fresh catalyst to continue the rally.

 

The next page turner for gold could come in several forms. A further rise in inflation, for example, could fuel fresh buying in the yellow metal that could force a challenge of previous all-time highs or beyond. If the stock market were to reverse course and trend lower, equity weakness could also drive investors to seek out alternatives in which case gold may benefit. Any other issue that fuels risk aversion could also set the stage for a gold rally, and any upside in the yellow metal could be met with increased buying as momentum and trend traders climb onboard for the ride.

 

Despite some drying up of fresh gold buying, the bulls still maintain firm control on the daily chart. The uptrend has been in place over two months and that trend higher may keep bargain hunters on the lookout for any dips worth buying. The bulls will likely target the June highs near $1920 per ounce as a next stop and a close above this level may attract a fresh round of buyers. The bears will try to force prices back down below support at the $1800 level. A close below $1800 could fuel further selling in the market and a significant, fresh leg lower in price.

The week ahead could see some rising volatility in the gold market and could provide important clues about the market’s intentions.

Is Gold On the Move?

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Thursday’s move solidly above the $1800 level may represent a resurgence for the gold market after the metal moved sideways for several weeks.  As the metal languished between the $1700 and $1800 levels, hedge funds increased their short positions while frustrated longs exited the market. Gold’s lack of an upside breakout above $1800 was a primary reason cited for recent and bearish hedge fund activity.

 

Oh how things can change in a day. The yellow metal is seeing a solid rise today, with spot prices up nearly $30 per ounce. That ascent has put gold back above the $1800 level with plenty of room to spare. In lunchtime trade, the metal is sitting around $1815 and will close not far off the highs of the day. The day’s strength seemingly points to further momentum ahead as short-term traders look to capitalize on the move, buying into the market as prices rise.

 

The inflation narrative is a primary factor for higher gold prices as concerns mount over rising price pressures. Real bond yields now sit at the lowest level since mid-February, with 10-year breakeven rates also higher. These factors are having a bearish impact on the dollar, and further dollar weakness could also send gold and other precious metals soaring higher.

 

Despite gold’s sharp rise Thursday, the bulls still have their work cut out for them. For starters, the bulls will need to maintain the day’s momentum through the close on Friday to prevent any bearish activity from taking hold. Assuming that hurdle is cleared, the market must then make a move to resistance in the $1850 area for a key challenge. If that is not enough, the bulls will also have to contend with the market’s 200-day moving average just above that region in the $1870 area.

 

Given much of the market’s recent sideways and lackluster price action, the bulls may not become overly excited unless the market takes out resistance in the $1850 region. A move through this area, on a closing basis, could set the stage for a bullish ignition in the market that could take gold to new all-time highs and beyond in the weeks ahead. The gold market needs to contend with changing inflation expectations, changing policy expectations and competitors such as Bitcoin. Despite these potential obstacles, however, the gold market appears to be in a solid, long-term position in which it may gain ground and rise in value. Unlike Bitcoin, however, the gold market may take longer to rise in value, although such a rise could prove to be far more sustainable over the long run.

 

Despite improvements in the economic data stream, the Fed is unlikely to change its position anytime soon. Friday’s jobs report, in which the country is believed to have created nearly 1 million new jobs in April, could be a simple litmus test of gold’s resolve. If the nation did in fact add a lot of jobs, it

stands to reason that expectations for changes in the Fed’s thinking could rise. Such a scenario could be considered bearish for gold and prices could fall. On the other hand, if the jobs data is far weaker than expected, it could add to the line of thinking that concludes the central bank will not make any moves for some time to come. This scenario could be considered bullish for gold and prices could rise on the news. Either way, the jobs data is unlikely to be a major factor for gold in the current setting and any price action in gold may prove to be nothing more than knee-jerk in nature.

Basel III Effects on Gold

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Sometimes the rules work in your favor. That is expected to be the case as the rollout of Basel III takes place in Europe and Britain. The European rollout is set to take place at the end of the month, while the British rollout will not go into effect until January.

 

To understand how these regulations may be bullish for gold, it is important to understand what they are and their intentions. Basel III is effectively a set of regulations for bank capital, stress testing and market liquidity. Although many of these guidelines were introduced following the financial crisis of 2008/2009, many aspects of the guidelines are only being rolled out this year.

 

Basel III will make gold a risk-free asset, while making unallocated gold more expensive to transact. This would seemingly make it wise to purchase physical gold, with substantial rewards awaiting those that do. Making gold a risk-free asset may strongly encourage central banks to buy more, as it may serve to balance their books.

 

The decision to make gold risk-free was not made recently. It is a decision that goes back to 2017, a year in which central bank gold buying hit a record of over 650 tons. The massive 2017 gold buying may serve as an illustration of how the risk-free status may cause additional buying of the metal, and a new record could very well be seen in the year ahead.

 

One of the most interesting aspects of Basel III is the fact that it does not classify gold as a commodity but rather a currency. This would seemingly suggest the opinion of gold has shifted, and that it is viewed as less of a risky and volatile instrument but as more of a stable form of money. This makes a lot of sense, given the fact that some believe gold is the last true form of money that exists.

 

With central banks essentially being given the green light to load up further on gold, there may be little standing in the way of dramatically higher gold prices in the months and years ahead. If global central banks (the most powerful financial institutions on Earth) see reason to buy and hold physical gold, shouldn’t you?

 

The most recent Basel regulations seem to underscore what we and other bullion fans have been saying for a long, long time. The gold market is not simply a commodity and not simply an “asset.” The yellow metal serves a very important purpose. Gold, unlike fiat currencies, can maintain its value over time. Unlike fiat money, it cannot be manipulated (creating more out of thin air), and it is of finite supply. As the Federal Reserve and global central banks continue to ruin their respective currencies, gold may be the last man standing. That makes now the time to start planning ahead. The protection of your financial future depends on taking action, and that action has never been as important as it is now.

 

Every single dollar you currently own and every investment you have that is dollar- denominated is likely to lose significant value in the years ahead. If the thought of paying $8 for a gallon of milk or $6 for a loaf of bread frightens you, then you need to carefully consider how your life may be affected if the dollar drops in value substantially. In our view, it is not a question of “if” but rather “when.”

Short Trading Week Ahead

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The gold market is off to a slow start Tuesday as the holiday shortened trading weeks gets started. Spot prices are down a few bucks per ounce, taking the metal below the $1900 level in the process. Earlier in the session, gold hit a five month high before seeing some profit taking and selling enter the market. Bullish price action in two key outside markets, including higher oil and a weaker dollar, may keep gold prices from declining much further today.

 

The notion of rising inflation will also play a role in gold’s price action this week as investors become increasingly concerned over the idea of increasing inflationary pressures. Gold ETFs have seen an increasing amount of capital inflows in recent weeks in a trend that may continue. The rising inflationary concern may keep the gold market well supported for the months ahead while also pressuring equity and bond markets. Such a market scenario could lead to an uptick in gold and silver prices while providing these markets with the ammunition necessary to challenge previous all-time highs or beyond.

 

In addition to oil and the Dollar Index, gold investors are also likely to pay close attention to Bitcoin and the crypto space in the weeks and months ahead. Bitcoin recently traded as high as $65,000 before seeing a pullback that has dragged the digital currency down to the low $30,000 range. The recent volatility in Bitcoin and other cryptos may be due to several factors and it will be interesting to see if the currency stages a powerful comeback. Although some analysts have suggested that much of Bitcoin’s recent ascent was due to inflation hedging purposes, it seems unlikely that such an instrument could overtake gold as the leading hedging instrument. The amount of volatility seen in Bitcoin may be too high for the average investor to stomach, and a hedge that cannot be held onto for the long-term is not really a hedge at all.

 

Despite Bitcoin’s flaws and its volatility, it is likely to continue to compete with gold as a viable hedging instrument. That being said, if the price of Bitcoin really falls apart even further, much of the capital that would presumably exit the currency could find its way into the gold market. This could keep gold’s trajectory moving higher, albeit on a much slower pace compared to Bitcoin. That slower pace may become increasingly attractive to investors that have been burned by Bitcoin or cryptocurrencies, and it may keep the trend up in gold for the foreseeable future.

 

The bulls have again taken full control of gold on the daily chart and the trend remains higher. The bulls will likely target previous resistance around the $1970 area as their next objective, while the  bears may target support seen in the $1850 region. If the bulls are able to take out the January highs around $1970 on a closing basis, look for the market to put together a powerful and rapid rally that could take it to previous all-time highs or beyond.