The gold market is sharply higher Friday as a key recession gauge hit a 40-year high. Investors are reacting to the news that the yield on two-year notes has overtaken the yield of 10-year notes by 50 basis points. This is the most significant yield curve inversion since the 1980s, the last time the Federal Reserve was this aggressive with interest rates. Gold is higher by more than 2% on the day as the inverted yield curve and bargain hunting fuel the upside.

An inverted yield curve has always preceded a recession, and there is no reason to think that this time will be any different. With recession odds at 40-year highs, gold could stand to see more follow through buying in the weeks ahead. Although investors still expect the Fed to continue on its inflation fighting path, raising rates through 2023, that projection could change quickly if the threat of recession turns into reality. The Fed could very well find itself singing a different tune in early 2023 if the economy does tip into a full-blown recession. Not only could rate hikes stop, but the central bank could also even decide to start easing rates and taking them lower again.

The Fed has stated it wants to get inflation back to its desired target of 2% annually. This goal seems quite far-fetched at this point, however, as inflation remains near 40-year highs despite the Fed having hiked rates aggressively over the last year. The Fed could discover, sooner rather than later, that its objective is unattainable. Once the Fed realizes this fact, it may take an increasingly dovish approach to monetary policy and could start to take rates down again.

Also adding to some bullish sentiment this week was a recent report from the World Gold Council. The report stated that central bank buying of gold in the third quarter hit a record. Central banks bought nearly 400 tons of gold in Q3 for the biggest buying quarter on record. There could be numerous reasons for this increased central bank demand, including worries over the dollar, the war in Ukraine, the threat of a Chinese invasion of Taiwan and fears of a global recession. Whatever the case may be, if the largest financial institutions on the planet are buying gold, perhaps you should consider buying gold as well.

The market remains range-bound. The $1600 and $1700 levels are the key technical areas that must be breached for an extended move. The market has remained in between these levels for weeks now, and there is nothing to stop it from remaining in between them for an extended period of time. Once gld does breach these levels, on a closing basis, it could signal the beginning stages of an extended run that could take gold back to all-time highs or down to $1500. Central banks appear to feel odds may be greater for upside than downside. Either way, the long-term bullish thesis for gold remains fully intact.

Although you wouldn’t know it from the gold market’s recent behavior, central bank buying of the yellow metal has remained robust. These financial powerhouses have bought significant quantities of gold in the third quarter as inflation worries and other factors have fueled market volatility and investor angst. A quarterly report by the World Gold Council stated that central banks grabbed nearly 400 tons of gold in the third quarter, the most on record. The WGC also suggested this figure represents a jump of some 300% from the year prior. Obviously, central banks are seeing the need to go out and buy gold. Perhaps you should consider doing the same.

Of interest in the WGC report is the fact that the largest players were anonymous. Some nations, such as China and Russia, often prefer to keep their gold buying to themselves and do not report their purchases. Given the current war in Ukraine and a possible Chinese invasion of Taiwan, it certainly seems plausible that China and Russia could be the faces behind the anonymous buyers.

Of the known buyers, the central banks of Turkey, Uzbekistan and Qatar were the biggest purchasers. Turkey bought 31 tons of gold in the third quarter, boosting its total reserves to some 489 tons. Uzbekistan has been buying gold consistently, and added 26 tons to its holdings in the quarter. Qatar added 15 tons of gold in July, its largest monthly purchase on record.

The recent string of gold purchases has been a stark contrast to what has happened in the gold market. Prices have declined for seven straight months now, and one has to wonder if those declines could have been far steeper without such heavy buying from central banks. Gold ETF outflows have also likely been a factor. These ETF outflows are likely to continue until sometime next year which is the soonest the Fed would likely begin to pivot away from the inflation fight.

Gold’s fortunes may remain unchanged until the Fed does in fact start to pivot away from raising interest rates. The Fed will almost certainly finish off the year with another hike next month. Next year and early 2023 remain up in the air, however, and could provide the Fed a chance to start undoing the mess it has created by raising rates aggressively over the last several months. Once the central bank begins to ease rates again, the gold and equity markets may both breathe a sigh of relief and start heading higher again.

Until that time, the market remains stuck in no man’s land. The $1600 and $1700 levels remain key technical areas that could dictate price action for the months to come. Whichever side is breached first, on a closing basis, may see prices continue in that direction for a period of time. Such a breach could be a ways off still, however, and the market could maintain a tight trading range for some time.

The gold market is seeing some solid selling pressure in early action Friday. Just as gold rallied Wednesday as the dollar declined and yields stumbled, the gold market is today being sold off as the dollar and yields rebound. With few outside developments to drive the gold market, investors have been focused on its key outside markets in recent action. The dollar and treasury yields have both been major factors for price action in the gold market and will likely continue to act as such for the foreseeable future.

The Fed is set to meet next week, and at that point the gold market may have more to go on. It is widely expected that the Fed will implement another 75-basis point rate hike next week, its fourth in a row. What investors may be more interested in, however, is the central bank’s commentary. While the Fed will almost certainly hike rates again in December to finish the year, that hike could be smaller than recent hikes have been. A 50-point hike to end the year could potentially send investors a message that the Fed may take an increasingly dovish approach to policy in the year ahead.

The gold market may also be affected in the weeks ahead by global events. The war in Ukraine is still raging on, and the threat of a Chinese invasion of Taiwan appears to be on the rise. Should another war break out somewhere in Asia or elsewhere in the world, investors may flock to perceived safe haven assets such as gold. The war in Ukraine has been fairly quiet for some weeks now. That quiet can turn to noise and turn quickly, however, if things change.

The gold bulls may need to keep waiting for the Fed and its plans for early next year. The central bank has, thus far, stuck to its guns and continued hiking rates aggressively. While it is extremely unlikely for the Fed to adjust its policy or goals this year, early next year could provide the central bank an opportunity to take its foot off the gas pedal and take a pause from hiking rates. Not only could the Fed elect to take a wait-and-see approach, it could even begin to start easing rates again if the economy has slowed down to a dangerous level. Although next year may sound like quite a way off, it is not. 2022 has only two months remaining and then 2023 will begin. Waiting until next year could also allow the Fed to preserve some sense of credibility as it may look foolish to make changes now after saying time and time again that it would stay the course until the job is done.

Gold may remain in a range for the next several weeks until more is known about the Fed’s plans for next year. The $1600 and $1700 levels are key technical targets for the bulls and bears. If either level is breached, on a closing basis, the market could potentially continue to move in that direction.

The gold market is higher on Wednesday as spot prices have climbed a solid $12 per ounce to now sit at $1665. The yellow metal hit a two-week high today as it benefited from a decline in treasury yields and the dollar. Also lending the metal a hand was stronger crude oil prices.

There are some key chart developments that could be pointing to something of significance: a top in the Dollar Index. At the same time, U.S. equity markets are showing some signs of a bottom having been reached. This could potentially mean that inflation has or is in the process of peaking. If that is the case, the Fed may not need to keep its foot on the gas with its aggressive rate hikes. The central bank could cross the finish line a lot faster than expected on its hiking campaign, and if so, markets may return to a degree of normalcy.

A dollar top and stock bottom could also suggest that the markets and global economy may be able to avoid a major recession that has been feared for several weeks now. Precious metals traders appear to be taking notice of these recent chart developments, possibly buying as they believe that the dollar and yields have already peaked and metals demand may improve if no recession is seen.

While it may be too early to tell if that is in fact the case, the yellow metal still has some significant hurdles to higher prices. The Fed will almost certainty hike rates again this month and next month, ending the year as it said it would. Not wanting to lose any credibility it has left, the central bank is unlikely to reverse course suddenly even if inflation has topped out. A pause or reversal by the Fed may be far more likely early next year. That does not mean gold cannot rise in the meantime,  but it is something to keep in mind.

The yellow metal remains stuck in no man’s land. The $1700 level is a key for the bulls in the short-term, while the bears will target a close below the $1600 level. Whichever side breaks first may be the side to which prices continue. The bulls have done a good job of absorbing much of the selling pressure seen in recent weeks. The bargain hunting buying seen during the last few months could eventually lead to an explosive upside move. The bulls appear patient and willing to wait. The bears, on the other hand, may be forced into a significant short-covering rally soon if the downside does not continue.

The dollar and the Fed likely hold the keys to gold’s fortunes. The Dollar Index is at the highest levels seen in years, while yields have also exploded higher to multi-year highs. If this trend stops or reverses course, the gold bears may get annihilated. The Fed could be the one to fuel such a reversal if it looks to take a pause or even loosen rates again.

Egypt does not appear to like the idea that its currency should be pegged to the U.S. Dollar. The new central bank governor and his team are already working on a new set of currencies and gold that would form a new currency indicator. In order to change the notion that Egypt is pegged to the dollar, it will create a new index that uses these currencies and gold to make an index for the Egyptian Pound.

Egypt and America are not major trading partners. It makes little sense, therefore, for the Egyptian currency to be pegged to the dollar. Even in the absence of a true peg, the idea that the pound is somehow pegged to the dollar seems irritating to Egyptians. They want their currency tlo be seen against every currency, not just the king dollar.

The commentary out of Egypt may be the latest salvo in the war against the dollar. For some time now, nations across the globe have expressed the desire to move away from the dollar as the global reserve currency of choice. Some countries, such as Russia, have already established means of transacting commodities, such as crude oil, not in dollars but in other currencies. Although the dollar is still considered to be the global reserve currency of choice, its days are likely numbered.

The dollar has not shown much weakness in recent months, that’s for sure. The Dollar Index now sits around the 112 level, an area it has not visited for many years. The Fed’s aggressive rate hikes and hawkish rhetoric have likely been a major catalyst for the dollar rally and could continue to act as such as long as the Fed maintains its current stance. If or when the Fed does reverse course, however, the dollar could find itself a long way from fair value with nothing to hold it up.

As a dollar denominated commodity, gold has a strong tendency to move in the opposite direction of the currency. As the dollar has risen in recent months, gold has lacked any upside and has declined. Should the dollar reverse and start declining, however, gold could find its way and return back to all-time highs or beyond. A major decline for the dollar could also drag treasury yields down along with it, also possibly boosting gold in the process.

The dollar has been the topic of much discussion in recent months, perhaps for the wrong reasons. Although the rally in the greenback has been impressive, the dollar could run into trouble. The U.S. remains in massive, massive debt with a tidal burden of over $31 trillion at this point. With rising interest rates, it may only be a matter of time before that debt becomes unserviceable. At that point, the U.S. could choose to default or to debase its currency. A currency debasement would lead to significant losses for those who are long dollars. At the same time, it could send gold skyrocketing into new all-time highs that could see the metal hit $3,000, $5,000 or even $10,000 per ounce in a very short period of time.