Gold Taking A Pause

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The gold market is off a few dollars per ounce in early action Thursday as the bulls take a breather. Spot gold prices are down by almost $6 per ounce on a busy economic data day as some back and fill trade takes place. Today’s decline should not only not be a cause for concern but in fact should be welcomed. Markets rarely, if ever,  move straight up or down. Today’s pullback may be nothing more than a healthy pause before the bulls look to take prices here again.

 

While the war in Ukraine rages on, Russian President Putin has again threatened the use of atomic weapons. In a threat against NATO, Putin reportedly suggested he would deploy those weapons in and around the Baltic if Sweden and Switzerland join the alliance. The war could be on the verge of a significant turn towards even more bloodshed and civilian deaths. The world is watching closely, although there may not be much more that other nations can do outside of sending troops.

 

In addition to the war, markets are also playing close attention to ongoing Covid developments in China. The country has already implemented lockdowns in parts of the country, including Shanghai, and President Xi Jinpoing reportedly sees no alternative to a zero-tolerance approach. The lockdowns in China may have a ripple effect that makes its way through all global markets within weeks. As the globe’s second-largest economy, any downturns in Chinese demand could weaken commodity prices. Crude oil, for example, could be quite a bit higher from current levels if Chinese demand were at full capacity.

 

The Chinese Central Bank appears ready to lower interest rates and reduce reserve requirements for banks. These actions are intended to free up liquidity in order to combat the slowdown seen due to Covid even though they may come at a particularly challenging time as inflation runs super hot around the globe.

 

The European Central Bank is meeting this morning and no changes are expected to its policy at the conclusion. The markets may listen carefully to the bank’s post-meeting commentary, however, looking for any clues about its policy plans going forward.

 

Outside markets are calm and may not be much of a factor in price action today. Crude oil and the dollar are both lower on the session. Yields on the 10-Year Note are stable at 2.675%. Rising yields have been a major source of market concern in recent months and the ascent may not yet be over. If yields continue to push higher, market dynamics could see a significant change as investors rethink where they put their capital to work.

The gold bulls will continue to look for a close above resistance at the $2000 level. A move above could set the stage for a rapid run higher that could take the metal to previous all-time highs or well beyond. The bears are looking to produce a close below $1900 and then $1850. There may be little, if anything, for the bears to get excited about without a move towards those levels.

Hot Inflation And Bullish Outside Markets Driving Gold

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In a follow up to yesterday’s upside, the gold market is moving solidly higher again today as hot inflation and bullish outside market activity fuel buying. Spot prices are up nearly $15 per ounce at lunchtime on Wednesday and are now well within striking distance of resistance at the $2000 level. The latest reading of the Producer Price Index showed a rise of 11.2% year-over-year and up 1.4% from the February reading. The 11.2% year-over-year reading is the highest ever recorded and represents the highest level of price inflation in 40 years.

 

Outside market action is bullish for gold today. The dollar is weaker after hitting a two-year high overnight. Benchmark 10-Year Treasury yields have backed down a bit as well in a welcome relief for markets. Crude oil prices are higher again today and are currently trading around $103 per barrel. The inflation narrative is likely to continue to be the primary driver of gold prices in the months ahead. Record setting inflation may keep buyers in gold motivated to keep buying and any dips may be snatched up by open arms rapidly. The ongoing war in Ukraine may also keep this buying going, as it not only increases inflationary price pressures but may also fuel a fear of the unknown and overall risk aversion.

 

The U.S. Federal Reserve is likely to continue raising interest rates in the months ahead. After hiking rates by 25-basis points in recent weeks, the Fed could even elect to raise the key interest rate by 50-basis points at its upcoming meetings. A larger rate hike could help the central bank get a handle on inflation but is unlikely to deter any serious interest in gold.

 

Now within striking distance, the gold bulls will look to produce a close above resistance at the $2000 level. If the bulls are able to produce a close above this level, the metal could find itself off to the races and may approach previous all-time highs in rapid fashion. The bears are looking for a decline to produce a close below $1900 and then $1850. The bears will not really have much going unless prices do close below $1850 which at this point is seeming increasingly unlikely.

 

The market is still in no man’s land but is rapidly approaching an upside breakout. Should the market see an upside breakout it could pave the way for a quick and sharp run higher. If stock markets weaken in the weeks ahead or if other market dynamics change, the yellow metal could see a fast run higher that could take it to $3000 or beyond.

 

Calls for peak inflation may be proven to be premature. Today’s hot PPI reading only serves to reinforce the negativity surrounding price pressures and the seriousness of the problem. It will almost certainly take some serious action from central banks to get a grip on the issue and inflation could be here to stay for much longer than previously anticipated.

Bulls Gaining Momentum

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The gold market is solidly higher today as the bulls gain further momentum. Spot prices are up over $15 per ounce as of this writing and currently stand at over $1969. The bulls could look for a push this week to take prices above resistance at the $2000 level. A failure at this level could set the stage for a reversal, however, and prices could see a significant decline if longs elect to bail out of positions. The bulls are out in force today following a hot inflation report and sharp rally in crude oil prices.

 

Inflation remains the talk of the town outside of the ongoing war in Ukraine. In the key data point of the week, the Consumer Price Index registered a reading of 8.5% year-over-year this morning, marking the highest rise in 40 years. Estimates were looking for a rise of 8.4%. On Wednesday, markets will get the latest reading of the Producer Price Index. This gauge will also likely show inflation running very hot and at multi-decade highs. Higher inflation levels have historically been bullish for hard assets like gold and this week may prove to be no different.

 

The Russian/Ukrainian war is now expected to take a bloodier tone. European countries may now be shifting their focus to arming the Ukrainians rather than implementing additional sanctions against Russia. The war may turn out to be far more protracted than previously thought and the fighting may intensify from this point forward after peace talks have reportedly stalled.

 

Outside markets are on the move as well. Crude oil is up several dollars on the day and is sitting around $105 per barrel. The Dollar Index is also up on the session and is sitting near a two-year high. The benchmark 10-year Note yield is now fetching 2.7% and could rise further in the weeks ahead.

 

Although the Fed has acknowledged the problem inflation poses and will attempt to get it under control through as many as seven rate hikes this year, higher rates are unlikely to have much impact on the gold price in the year ahead. Real interest rates are unlikely to go positive, and until they do, rate hikes may not even make the gold market flinch. Despite the threat of higher interest rates in 2022, the gold bulls may remain undeterred and may continue to buy any dips until proven otherwise. The same may be said for the investing public. The attraction of price dips to long-term buyers may prevent any significant declines in the gold market and could keep it moving higher into fresh all-time highs.

 

The bulls remain in control of the daily chart as prices hit a four-week high today. The objective for the bulls, in the short-term, is to produce a close above resistance at the $2000 level. The bears will look for a decline to produce a close below the $1915 area and then $1850.

 

Gold Slightly Higher As FOMC Minutes Awaited

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The gold market is moving up a tad in late morning trade Wednesday as investors await the minutes from the latest FOMC meeting. At the core of investors, angst is whether the central bank will actually elect to raise rates by more than 25-basis points at the next meeting and other meetings beyond that. The Fed has seemingly made clear it intends to fight inflation and will use all of the tools at its disposal to do so. The Fed has now said it sees a total of seven rate hikes for 2022, but with some 50-basis point hikes, rates could end the year significantly higher than originally expected.

 

Does the Fed have the guts. That may be the question now being pondered by many market participants as inflation continues to take a toll. The Fed is known for doing a lot of talk and not following up that talk with a lot of action. Whether this time around proves to be similar remains to be seen. The Fed has expressed increasing concern over price pressures, however, and has already adjusted the number of rate increases it sees in the year ahead. The central bank appears ready, willing and able to implement policies that could slow economic growth to a standstill. Aggressive monetary policy may be the only method the Fed has to combat inflation which now stands at the highest level in 40 years. After having seemingly backed itself into a corner, the Fed now must choose the lesser of two evils: Allow inflation to rage on while keeping rates moderate or act aggressively towards inflation and hike rates as much as necessary to get the job done.

 

In addition to the ongoing war against inflation, the markets are also having to consider the ongoing war in Ukraine. While no major news of substance has been seen in weeks now, the battle rages on. New sanctions against Russia may provide added pressure on the nation to rethink its plans, although the country has thus far not shown any meaningful signs of giving up. The threat of a potential ban on Russian oil and energy exports may keep energy prices elevated until the war is resolved or sanctions on energy products are actually implemented. Higher crude oil and natural gas prices could not come at a worse time, either, as they may also push the prices of already-elevated commodities even higher.

 

The gold bulls remain in control of the daily chart. Price action has been minimized in recent weeks and the market may simply be in back and fill mode before the next major move up or down. The bulls will look to take prices back above resistance at the $2000 level on a closing basis. The bears will look for a decline below $1900 and then the $1850 level on a closing basis. The market could spend several weeks or more in no man’s land as prices continue to consolidate. The longer gold goes sideways, however, the more major the next move up or down could potentially be. Given the current geopolitical and economic backdrop, the smart money may still bet on higher prices to come in the months ahead. This could keep any dips in the gold market being aggressively bought for the foreseeable future and may keep any dips in price from falling too far.

Investment Bank Calls Out Recession

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The worries over inflation have caused the Federal Reserve to take on a much more hawkish approach to monetary policy than originally anticipated. The Fed has already raised rates by 25-basis points and now believes it will have to hike rates another six times for a total of seven rate hikes this year. Not only is the Fed looking to hike a lot of times, but it is also even considering raising rates by 50-basis points rather than 25. If the Fed elects to do so, it would be the first such hike since the early 2000s and it has the potential to slow the economy drastically.

 

To be clear, higher interest rates do not always or automatically equal recession. The stock market has, however, grown very accustomed to ultra-low interest rates and easy monetary policy. Many analysts believe this policy has been the primary factor for stocks reaching new all-time highs and seemingly trending higher regardless of what has been thrown at the market in over a decade. The easy money party may be coming to an end, however, and some are betting that the end of easy money means the end of easy equity gains.

 

On Tuesday, Deutsche Bank became the latest investment bank to voice its concerns over the possibility of recession. The bank said that the economy will take a “major hit” during 2023 and 2024 and that the end result of an increasingly hawkish Fed looks recessionary. Deutsche Bank economists suggested that there may be two quarters of negative growth and a more than 1.5% rise in the unemployment rate. These would both be recessionary factors, although they could only point to a moderate recession.

 

Downside risks remain, however, and could put the U.S. on a much more negative path going forward. A more severe downturn cannot be ruled out, and the threat of such a downturn may change market dynamics for years to come.

 

Investors will pay close attention to Wednesday’s release of the latest FOMC meeting minutes. They will closely scrutinize the minutes looking for any clues about the potential for a 50-point hike in May. Fed Chairman Jerome Powell has said that the U.S. economy can handle higher rates. That notion may be tested sooner rather than later, however, if the Fed elects to become more aggressive. The CME Fedwatch Tool is currently pricing in a nearly 78% chance of a 50-basis point hike in May. The Fed minutes this week could reinforce that idea or give reason to lower those odds.

 

For the time being, the gold market may continue to maintain its recent trading range.  Any clues derived from the minutes or other Fed commentary could, however, send gold higher or lower, possibly breaking out of the recent range in the process. The bulls will still aim for a close above last week’s highs in the $1967 area while the bears will look to produce a close below $1900 and then $1850.

Bulls Still In Charge

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The gold bulls are still in firm control of the market as prices rose Monday to kick off the new trading week. The yellow metal rose today on stronger crude oil prices as well as ongoing worries over inflation. The ongoing war in Ukraine between Russia and Ukraine continues on, and Russia’s crimes against civilians are becoming increasingly apparent.

 

Ongoing Russian aggression could force the U.S. and its allies to implement even more sanctions against Russia. These could include bans on energy exports from Russia, which has the potential to send crude oil and natural gas prices sharply higher. Despite the possibility of additional sanctions against Russia, the markets have seemingly gotten used to the war and there has been little to no fresh developments in recent weeks. This has given investors time to focus their attention on other major issues such as inflation and its potential effects on the global economy. Price inflation has shown in the past to be bullish for precious metals, and this time around may prove to be no different.

 

Crude oil traded at over $101 per barrel today in price action that was significantly higher. The stronger crude oil market comes at an already bad time for investors and markets. Stronger crude oil prices may not only erode the purchasing power of the average household, but  may also lift commodities higher across the board. This could make current inflation somewhat self-sustaining while it pinches the wallets of both Americans and those abroad. Recent inversion in the yield curve may be pointing to an incoming  recession already, and continuing price pressures may only fuel further concerns over a major economic slowdown.

 

Despite the worries over a slowdown and possible recession, stocks have maintained strength in recent weeks. The equity markets are in the midst of near-term uptrends, and despite the threat of rates rising sharply in the months ahead, have maintained their appeal in recent weeks. Of course, the demand for equities could abate and do so quickly if the war takes a turn for the worse or if the Fed elects to take some form of stronger or surprise action to combat inflation. For the time being, however, stocks may remain a place to go for investors looking to put capital to work.

 

The gold market is still in a good place as well, and could continue to trend higher in the m months ahead. Price action recently has become choppy and irrelevant. The bulls will need to take out last week’s highs around $1967 to attract more momentum buyers. The bears will look for a decline to produce a close below the March lows around $1888. From there they will target the $1850 zone as their next primary goal.

 

Currently in no man’s land, price action could see more time in between these areas before making a sustainable move up or down. Whichever way the market goes may be sustained for a period of time. If the bulls move the market higher, new all-time highs could be seen shortly thereafter.