The gold market is lower on Friday as a soaring dollar and rising bond yields take a toll on sentiment. Down nearly $30 per ounce as of this writing, the market is now back below the important $1650 level and could see a test of $1600 in the days ahead. Risk aversion is higher this week and is pushing stocks lower. Equities are at three-month lows today as concerns mount over Russia’s invasion of Ukraine and its threat to use nuclear weapons if threatened. Russian President Putin appears to have been pushed into a corner now, and that could make him even more dangerous according to some analysts.

 

Markets are also being driven by concerns over a recession. Earlier this week, the Fed Chairman fed into those concerns as he said the Fed would stay on track in its fight against inflation. Should the Fed continue with its aggressive rate hikes in the months ahead, stocks may come under increasing pressure and the bear market is likely to continue. The Fed will likely keep raising rates into the end of the year, what it does in early next year remains anyone’s guess at this point. In order to preserve what credibility it still has, the Fed may continue with its war on price pressures into next year, with interest rates eventually topping close to the 5% level. Powell did suggest that rates would then begin to come down again slightly in 2024 and 2025, but did not suggest the Fed would be looking to actively take them there.

 

The U.S. is not the only nation concerned about a recession. Recent data from the globe’s second-largest economy, China, have been weaker-than-expected. Unlike the U.S., however, China is taking the opposite approach and is easing policy to give its economy a boost. More weakness out of China may spell trouble for the global economy, and it could not come at a more challenging time. China’s troubles come at a time when the U.S. and other major global central banks are actively tightening policy to try to get inflation under control. The further these central banks tighten, the more pressure is put on the global economy.

 

The long-term narrative for gold remains quite bullish in our view. This means that any further declines in the value of gold now may represent an excellent long-term buying opportunity for the patient investor. The yellow metal could now see a decline all the way to the $1550 area before finding more solid footing. That might be OK with the long-term bulls, who would rather buy gold when it is on sale than at highly inflated prices.

 

Although the great turnaround for gold could take time to develop, it will come about at some point. When it does materialize, those who bought gold at current levels or even lower will find themselves laughing all the way to the bank. Those that didn’t may realize they have missed the opportunity of a lifetime.

Risk aversion in the marketplace remains elevated this week as markets prepare for another aggressive rate hike from the Fed on Wednesday. The Fed is widely expected to implement another aggressive rate hike of 75-basis points. Some have even priced in the chances of a full 100-point hike. Whatever the Fed does, the markets may be far more interested at this point in its commentary following the rate decision.

 

A large hike Wednesday appears to be fully baked into the cake. The Fed’s plans for the next few months, however, and early next year are still largely undetermined. Markets seem to be of the opinion that the Fed is likely to keep hiking through the end of the year. The central bank could, at that point, take a pause from its aggressive hiking. Perhaps the biggest question investors may have is whether the Fed will reverse course and decide to start easing policy at some point.

 

For now, the Fed appears to be determined to get inflation under control. The Fed has stated several times it feels inflation to be the biggest risk to the economy. That could keep the central bank tightening for a long period of time, as inflation still remains near 40-year highs. Markets have thus far not felt an overwhelming sense of dread at the prospect of higher rates. That could change, however, and change quickly if the Fed really continues rolling.

 

The Fed’s credibility is also at stake. If the Fed succumbs to the pressure of unhappy investors and politicians, it would seemingly suggest the Fed is not up to the task at hand. If the Fed does remain on course, it is likely to put pressure on stocks and risk assets and may keep investors running to cash. If the U.S. is not already in recession, one may become increasingly likely in the months ahead. The true test for the Fed may come at this point, when pressures mount to halt hiking or start lowering rates.

 

For the time being, and likely until the end of the year, the gold market may continue taking its cues from the dollar, yields and geopolitics. Any change in action or rhetoric from the Fed could have a dramatic impact on the dollar and yields, which have both benefited from the idea of higher interest rates. The dollar recently hit a 20-year high, for example, while yields also hit their highest point in some time. These assets both compete with gold, and their upside has limited gold’s a great deal. If they were to reverse course, the gold market could also reverse course and become a buyer’s market.

 

Gold remains on the defensive, for now, and may see lower lows before finding more solid footing. The market has tried to hold long-term support around $1675 but today appears to be failing. If the market does fail to hold this level on a closing basis, it could set the stage for a run lower, possibly all the way to the $1550 area before finding willing buyers.

The gold market is on sale now, as prices nearly hit a 2.5-year low Thursday. The yellow metal is being hit by a number of bearish factors, including recession worries, demand concerns and a hawkish Fed. With spot prices now well below the $1,700 level, there may be little in the bears’ way of taking the market sharply lower. The metal could see $1,550 before finding some solid footing and any rallies in the meantime could prove to be short-lived.

 

Precious metals investors are concerned about the health of the economy. With the Federal Reserve likely hiking rates by another 75 points next week, possibly even 100 points, worries over a major economic slowdown may weigh on gold for some time. A slower economy could equate to less demand for metals from both investors as well as commercial users and could keep prices depressed for an extended period of time.

 

The U.S. Fed is not the only source of concern. Other global central banks are also looking to tighten policy, and the global environment of rising rates may weigh on the global economy. Not only that, but recent data out of China has not been great. A decline in several key areas of the globe’s second-largest economy could spell trouble for the rest of the world. Unlike other central banks, China has been easing policy to boost its economy. China is likely to continue to ease despite being the only major economy to do so.

 

Stocks are under pressure Thursday as treasury yields rise. Higher yields may also keep gold under pressure in the months ahead and could also bolster the dollar. Higher yields and a stronger dollar have been a major roadblock to higher gold in the last several months and may continue to act as such in the months ahead. A hawkish Fed statement next week along with an aggressive rate hike could keep the dollar climbing and may also keep upward pressure on yields. The trends in yield and the dollar are unlikely to change anytime soon and may remain in place until the Fed takes a more dovish tone.

 

The months ahead may become increasingly challenging for markets across the board. If the U.S./ does enter recession, the stock market and risk assets could take a significant tumble. As the economy slows, demand for commodities such as silver and gold could also take a hit. Trouble in the Chinese economy may only reinforce a drop in demand and could keep commodity markets under pressure.

 

The decline below the $1700 level may keep the bears on the move. There is little to stop the market now until the $1550 level is reached, and that area could be seen sooner rather than later. Volatility in the gold market could potentially rise now that the market is on the move again, and any rallies may be sold into until proven otherwise.

The biggest economic data point of the week has now come and gone. The latest reading on the Consumer Price Index was not a good one, either, and took with it any hopes for the Fed to take it easy this month when it meets to hike rates again. The Fed will now almost certainly look to raise rates aggressively again, which could mean the third 75-point hike in a row.

 

The CPI data today showed inflation remaining red hot. Year-over-year, inflation jumped by a whopping 8.3%. Estimates were looking for a rise of 8%. Despite some recent signs that inflation had perhaps cooled off a bit already, today’s CPI data shows the opposite. Inflation not only remains smoking hot, but could get hotter before finally cooling down. This pits the Fed into a poor position. The central bank will now likely see itself having no choice but to continue raising rates aggressively. That means a large hike later this month and possibly more large hikes before the end of the year.

 

Stocks are taking it on the chin today. The Dow Jones Industrial Average is down by 700 points in early action. Today’s equity declines could be a foreshadowing of what may lie ahead for stock investors. Stocks do not like inflation nor do they like higher interest rates. Both of these may weigh on equity markets for the foreseeable future and could drive capital from stocks into alternative assets such as gold.

 

The fight against inflation could rage on further for some time. The question may become whether the Fed is willing to take rates where they may need to go to get inflation to manageable levels. That remains to be seen, but for the time being the central bank still has plenty of room to take rates higher from recent levels. A series of additional hikes by the Fed may really start to get the markets’ attention. This could not only fuel a massive spike in volatility but could also drive a shift of investment capital into alternative asset classes.

 

Inflation may not be the only major market driver in the months ahead. The current state of geopolitics is very messy and could also weigh on investor sentiment and risk appetite. As the war in Ukraine continues, concerns are now growing that China could invade Taiwan. A Chinese invasion would be bad on several levels, and could be the starting point for the Third World War. The U.S. and the west would likely see no alternative but to get involved. The involvement of the west could lead to other eastern or Asian players also getting involved, and that could lead to quite a geopolitical mess. Markets could potentially tank under such a scenario, and gold could possibly see much investment capital finding its way into the metal under such circumstances.

As the globe’s second-largest economy, any issues affecting China will not be taken lightly. The Chinese economy has already slowed and could slow further. A period of war or aggressive saber-rattling is not what the global economy needs right now. Such issues could put the economy into recession and keep it there for some time.

The gold market finished the trading week on the strong side of the ledger, moving higher by about $7.50 per ounce. The bulls are trying to put some distance between spot prices and the $1700 level. Although spot prices remain below the $1720 level, the bulls do now have a bit more breathing room.

 

The gold market has been largely sideways for months now. The past several weeks have seen little in the way of sustainable movement as the market awaits the next FOMC meeting later this month. The Fed has been the source of much confusion and speculation in recent weeks and the meeting may provide markets with some more clarity about the central bank’s intentions.

 

The big question being pondered by investors right now is how far the Fed may be willing to go to tame inflation. Price pressures remain near 40-year highs. There have been some recent signs of inflation possibly having peaked already, however, and markets are paying close attention to them.

 

In addition to the inflation situation, markets are also watching the economy closely and monitoring it for recession. The U.S. could possibly be already in a recession, and some recent data from China may indicate that the world’s second-largest economy is not far behind. Worries over the possibility of a recession have been on the rise in recent months as the Fed has, thus far, stood its ground and continued to hike rates aggressively. More of that is expected this month when the FOMC meets again. Fed Funds are pricing in near even odds of either a 50 or 75-point hike this month.

 

The Fed is likely to finish out the year on the aggressive side, likely hiking rates until the end of the year. After a few more hikes are implemented, however, it becomes far less clear what the Fed may or may not do. Some have suggested the Fed is likely to take a pause in the new year, or even reverse course and begin easing policy as tighter conditions take their toll.

 

What this may mean for the gold market is also unclear. A looser Fed could, however, dent expectations for the dollar and treasury yields, bringing both down in the process. Any significant weakness in yields or the dollar could be bullish for gold and could potentially fuel a sustainable rally higher. The bulls could try to push prices higher in the near-term. Any moves higher right now would be suspect, however, as the market may currently be lacking the necessary ammunition for a sustainable run to the upside.

 

The next several weeks will see the gold bulls target the $1750 and $1800 levels. If able to produce a close above $1800, the bulls could find themselves in business for a run to the upside. The bears are trying to produce a close below the $1700 level and if able to do so could see prices embark on a fresh and significant leg lower.