A Big Test Ahead

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The question of how gold may fare in the weeks ahead has become increasingly about its ability to tolerate another 75-point rate hike next week. The yellow metal has ended a five-week losing streak but still has numerous obstacles in the way of higher prices.

 

After the European Central Bank, or ECB, raised rates for the first time in over a decade this week, the U.S. Fed is widely expected to do the same next week. The Fed is expected to raise rates by 75 basis points, if not 100, on July 27th.

 

Another large rate hike from the Fed next week is seemingly a foregone conclusion. How the hike could affect the dollar and gold remains to be seen, however. After hitting a 20-year high in recent days, the dollar has backed off a bit from recent highs. Dollar weakness may be nothing more than some short-term profit taking, and the currency could easily resume its trend higher next week after the Fed raises rates.

 

The dollar has been moving higher based on the notion of an aggressive Fed and higher interest rates and widening rate differentials. The greenback recently hit parity with the euro for the first time in many years and could maintain its growth against the shared currency in the months ahead.

 

The gold bulls have their work cut out for them for sure. There was some encouraging price action this week, however, that could point to some further upside. After sliding lower earlier in the week, the gold bears took prices below the key $1700 level. Price could not be sustained there, however, and the bulls jumped in to buy and the market closed well above the $1700 level. On Friday, the bulls built on some gains seen late Thursday and have now put some distance between current prices and the $1700 area. Whether those gains hold after another large hike from the Fed is unclear.

 

Despite gold’s recent slide and a lack of any upside, the long-term narrative for gold remains unchanged. Massive sovereign debt, dollar weakness, and economic uncertainties may all play a role in gold’s eventual upside. Central banks and governments all over the globe hold massive amounts of physical gold, and with good reason. Gold can provide them with credibility for their respective currencies, it can provide portfolio diversification and it can also even give them peace of mind.

 

Taking into account the fact that the largest and most powerful financial institutions on the planet buy and hold physical gold, shouldn’t you consider doing the same? Gold at $1730 may prove to be a bargain-basement price in the months or years ahead. Current prices in gold may not only be temporary but may never be seen again once the metal takes off.

 

Focus on the long-term, not the short. If you see gold as a value add, then now is the time to be buying it. Don’t be alarmed by short-term volatility and price swings, either. Just focus on the metal’s long-term, bullish narrative and trend and buy what you can afford to buy.

 

The Bulls Need A Dollar Break

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Could poor economic data give the gold market a boost? That seems to be the case today as gold rises following a larger-than-expected rise in weekly jobless claims. The U.S. Department of Labor reported today that weekly jobless claims rose by 7,000 to a level of 251,000. This is up from last week’s figure of 244,000 new claims and could be pointing to further weakness in the labor market ahead.

 

Consensus estimates were looking for a rise of 240,000 claims, making this the third consecutive week that claims have risen above expectations. It also represents the seventh consecutive week that claims have risen higher in what could be a worrisome trend.

 

The worse-than-expected jobless claims have put the brakes on the dollar today. The currency has been on the ascent in recent months, and has likely been a major roadblock to higher gold during that time. The dollar has likely been seeing some benefit from the Fed raising rates aggressively and from the notion that the central bank will continue to do so in the year ahead.

 

Although the dollar has been rising on the back of an aggressive Federal Reserve and policy expectations, there are still numerous reasons for the currency to eventually fail and reverse course. Massive sovereign debt may be the primary, bearish issue for the dollar. The Fed simply has no mway of ever being able to repay the nation’s debts without a massive currency debasement. The idea of higher interest rates only makes matters worse, as it will add billions to the amount paid by the U.S. in interest on an annual basis. Something’s gotta give, and the day of reckoning for U.S. debt will likely arrive sooner rather than later.

 

The dollar has shown some resiliency in recent weeks and today may be no different. The greenback is attempting as of this writing to return to the highs of the session after taking a significant dip earlier in the day. Although gold can manage to stay elevated while the dollar climbs, a stronger dollar makes it more challenging as it may limit the amount of foreign buying in the metal. Trading around a 20-year high currently, the dollar could send another wave of selling into gold should it continue its recent upside and keep moving higher. With the Fed seemingly ready to raise rates by another 75-basis points or more next week, the dollar rally could have more ground to cover in the near future.

 

The $1700 and $1800 levels remain key for the market. The bears will try to produce a close below the $1700 level, and if successful, could see a fresh wave of selling enter the market. If the bulls are able to rally and produce a close above the $1800 level, it could have the opposite effect, attracting fresh buyers and momentum players into the market. Volatility has contracted in recent weeks, therefore, the market could be getting ready for a significant move one way or the other.

Gold Could Be Making Large Move Soon

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There has not been much to report on the gold market in recent weeks. The bears did cause prices to slide, however, and the market has been eyeing a test of the $1700 level for days now. Volatility within the market has seemingly collapsed in what could be a sign of a large move to come. That large move could be on the downside, given the current trend lower and other factors. Safe haven buyers have mostly stood by on the sidelines as risk appetite has returned to a degree.

 

Corporate earnings remain the center of attention for stock investors. Stock buyers have been able to rekindle prices on the daily chart, which are now in a short-term uptrend. Whether that trend continues remains highly questionable, however, as numerous bearish factors remain in play. Despite the trend higher for equities, however, the markets remain vulnerable to whims as summer trading doldrums take hold.

 

In what is perhaps the data highlight of the trading week, the European Central Bank is set to meet tomorrow and is expected to raise interest rates. The ECB could hike rates by .5% in the first hike done in some 11 years. Any move by the ECB tomorrow is likely to be followed up by the U.S. Federal Reserve next week. The Fed is highly likely to raise rates by another 75-basis points next week, with some even suggesting that a full, 100-point hike is possible. Not wanting to upset equity market investors, the Fed may err on the side of caution and stick with just a 75-point raise.

 

Worries over a Fed-induced recession remain robust and could be exasperated next week should the Fed raise by 75 or more points. The 2/10 year bond yields remain inverted today, in another worrisome sign of recession. Despite the risk of recession, the Fed has stated time and time again that it intends to get inflation under control and not allow it to become entrenched. Seeing this as the worse of two evils, the Fed may continue raising rates throughout the end of the year or beyond.

 

Yields have been on the rise again in recent action. The benchmark 10-Year Note is now fetching a yield of over 3.16%. The dollar is slightly stronger at midday today while the crude oil market dips. Outside markets may be pointing to some more difficult times ahead for gold. Despite that, however, the long-term bullish narrative for gold remains unchanged. Massive sovereign debt levels, weaker fiat currency values and other economic worries may all support gold in the months and years ahead. For the time being, the bulls may need to simply absorb more selling pressure until a fresh catalyst fuels a reversal. Once a reversal takes hold, the market could potentially skyrocket quickly as shorts are forced to cover and as FOMO sets in. The bulls will need to produce a close above the $1900 area before longs start getting excited and jumping in.

Fresh Inputs Awaited

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The gold market is steady in early afternoon trade Tuesday as the market appears to be awaiting some fresh inputs. The outside markets are playing a large role in price action this week. Weaker crude oil and rising treasury yields are both keeping any upside limited. Dollar weakness, however, may be giving the market a little bit of a boost.

 

The big data point of the trading week is set for release Thursday. The European Central Bank is expected to meet and raise interest rates for the first time in over a decade. The ECB is anticipated to raise interest rates by .5%. The U.S. Federal Reserve is widely expected to follow the ECB the week after, hiking rates by .75%. Although the rate hikes themselves are important, what may be even more important this time around is the central banks’ commentary.

 

It is no secret that inflation has taken the word by storm in recent months. What is unknown, however, is exactly how central banks plan to get it under control. While raising interest rates is one tool at the disposal of central banks, they may need more tools to stand a chance at winning this battle. Barring a Volcker-era style interest rate around the 20% level, central banks may need to find more ways to combat runaway inflation.

 

Not allowing inflation to become entrenched is key at this point. Should price pressures become entrenched, it could become much more difficult, if not impossible, for central banks to fulfill their mandates and keep prices stable. Fed Chairman Jerome Powell seems to understand this risk, and he has said the Fed will do whatever it takes to get prices under control again. This attitude has become a cause for concern among some, however, as the Fed could very well hike the nation into a recession. A Fed-induced recession has become a major topic of concern in recent weeks. Should the Fed continue to raise rates by 75 or even 100-basis points at a time, the economy could very well find itself slowing down to the point of contraction.

 

As the summer trading doldrums become increasingly boring for market participants, many markets such as gold may need a fresh catalyst to move higher or lower. The long-term bullish narrative has not changed at all since the metal began being sold off weeks ago. Despite the metal’s slide over the last several weeks, lower prices do represent a great long-term buying opportunity for patient investors. While it is unclear if the recent selling has now been exhausted, any move below the $1700 level is likely to be aggressively acquired by long-term bulls and may allow the market to find some bullish footing.

The $1700 and $1800 levels may be the technical keys in the weeks ahead. The bulls must produce a close above the $1800 level, while the bears will target a close below $1700 to attract additional selling pressure.

 

 

Bears Strong But Bulls Holding

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The gold bears have gained some momentum this week. The bulls have held the bears from doing even more damage, however, in what may be viewed as a market positive. The bears took the price of gold below the $1700 level Friday before the bulls jumped in and took prices back above this key level. The $1700 level may become a large tug of war in the days and weeks ahead. Whoever can establish dominance in this area may see prices go their way in the weeks ahead.

 

The gold market has been hit recently by a barrage of negative items. Inflation remains at a 40-year high. Because of this, the Fed is likely to hike rates again this month by 75 if not 100-basis points. The notion of an aggressive Fed and higher interest rates has sparked a rally in the dollar, which now sits around a 20-year high. Yields have also gotten a lift recently, with the benchmark 10-Year Note now yielding over 3% again.

 

The dollar strength and higher yields have had a severe impact on gold, and may keep any upside limited for now. If the dollar were to stage a reversal at some point, however, the gold bulls could take advantage and pounce on lower prices.

 

While inflation remains a point of market concern, commodity markets have been providing some signals that perhaps inflation has peaked. Declines in crude oil, cotton, copper and more may all point to easing price pressures in the months ahead. Not only that, but these easing commodity markets may also be signaling that a recession has already arrived or is very close. Should the economy enter recession, the Fed could elect to take a pause from its rate hikes or to even reverse course. If this happens, gold could benefit handsomely as it could drive the dollar and yields lower.

 

Whatever it may prove to be, the gold bulls do need some fresh, bullish catalyst to take prices higher. The bulls have been lacking any significant bullish news for several weeks now. During that time, the bears have taken and maintained momentum as prices declined from well over the $1800 level to near the $1700 level. Although the market may now be oversold, there is not much to hold it up except the willingness of bargain hunters to jump in and buy around current price levels.

 

The bulls have significant work to be done in order to get prices moving higher on a sustainable trajectory. The bulls must first produce a close above the $1800 level to negate some of the recent bearishness. A close above $1900 would be even better, as it could attract a wave of fresh longs into the market and possibly send it back towards all-time highs. For the time being, however, the bulls will need to try to avoid a close below $1700. A close below this level could set the stage for more downside and a longer road higher again for the bulls.

 

 

Bears Now Pressing

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The gold bears are now pressing their positions, taking prices below the $1700 level in earlier action Thursday. Although the yellow metal has since bounced back above $1700, the bears appear to be in firm control of the market at this point. That could mean that a capitulation type of event may be in store sooner rather than later, and gold may only begin to find more solid footing once it does.

 

The market is being pounded by several bearish elements. A rising dollar, higher yields and worries over a recession to name a few. Declining crude oil prices are also a factor for gold, which hit an 11-month low today. The release of the Producer Price Index earlier today did not do anything for the gold bulls. In fact, the hotter than expected PPI figure (which showed a rise of 11% year-over-year) has seemingly only served to boost interest rate expectations. Markets are now pricing in a good chance of a full, 100-point rate hike at the next FOMC meeting on July 27th.

 

Should the Fed elect to raise rates even more aggressively and go for a 100-point hike, it could potentially dampen economic activity further and possibly increase the risk of a recession hitting. Some have argued that the U.S. is already in recession, although that remains unclear. The Fed has suggested that it could raise rates quite a bit further without putting the economy into recession, and time will tell whether the central bank is accurate or not.

 

The notion of an aggressive Fed has likely been a major factor for dollar strength in recent months. The dollar hit a fresh 20-year high today, as rate expectations and differentials drive buying. The so-called “carry trade” is in full effect right now, whereby investors in other nations dump their currencies to invest in dollars. This trade may continue for some time. As it does, it could take the dollar significantly higher from already-elevated levels. This could mean that dollar strength may continue to weigh on the greenback for some time to come. It does also set the stage, however, for a large scale dollar reversal should the Fed take a more moderate approach or decide to reverse course at some point.

 

The 2/10 yr yield curve remains inverted, and is the most inverted it has been in over two decades. This inversion may be a strong indicator of a recession coming sometime in the months ahead. Investors will pay close attention to the yield curve and may become increasingly agitated by any further inversion. The yield curve inversion is one possible clue about impending recession. The pullback in broad commodity prices may be another. Whatever the case may be, investors are now on the lookout for any further signs of recession and may adjust their portfolios accordingly. Although this may currently be a bearish factor for gold, it could also reverse in the months ahead and drive investors into gold and perceived safe haven asset classes.

Knee-Jerk Reversal

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The gold market was under some pressure earlier in the session. Following the June CPI print, gold moved rapidly lower down to a level of $1707. The metal quickly reversed, however, and now is up sharply on the day by nearly $15 per ounce. Despite the numerous bearish issues gold currently faces, the bulls have done a good job of absorbing the selling pressure. This could bode well for gold in the medium and long-term and may lead to an eventual reversal and rally on the daily chart.

 

The release of the Consumer Price Index data, unveiled earlier today, may become a serious anxiety-producer for equity market bulls. The reading for June CPI came in hot, and even hotter than expected with a year-over-year reading of 9.1%. The blistering, 40-year high for inflation may have some adjust their thinking about the Fed and interest rates. There is now an excellent chance the Fed will see fit to hike another 75-basis points later this month. Expectations for a larger increase, such as 100bps, may now be on the rise as well.

 

The hotter than expected CPI figures do not coincide with some lower commodity prices, such as crude oil. A lower basket of commodities may have fed the notion that inflation could have already peaked. Data like today’s, however, could tell a very different story.

 

Outside market action today is bearish for gold. Crude oil is lower again today, currently trading around the $95 per barrel level. The dollar hit a fresh 20-year high and yields climbed significantly in the aftermath of the CPI release. Ten-Year Notes are now fetching over 3% again and could be poised to rise further in the days ahead.

 

The bears remain in control on the daily chart. The bulls have significant work to be done, and their first order of business mahy be to produce a close above resistance at the $1800 level. The bears will look to push prices lower and produce a close below the $1700 area.

 

The gold market remains in neutral territory, although the bears have clearly demonstrated their poise at this point. With the bulls absorbing all of the selling thus far, however, it begs the question of who may win the current tug of war. That will likely come down to a few factors. Has inflation begun to peak already? Will the Fed have to remain very aggressive? Could the war in Ukraine come to a close anytime soon? These are all questions that may need to be answered before gold finds its footing one way or the other. In the meantime, the bulls are likely to keep accumulating gold as its long-term bullish narrative remains unchanged. For those that are focused on the long-term value rather than the short-term fluctuations, gold may represent an excellent value at current price levels which may not be seen again once the market takes off.

Stronger Dollar Has Gold In Headlock

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The gold market is slightly lower in early action Tuesday. The yellow metal hit an 8.5-month low overnight and is seemingly stuck as the dollar continues to rise. The market is also being hampered by lower crude oil and a lack of fresh, bullish inputs. There are several major issues currently going on, none of which are helping gold at present, however, The spread of Covid-19, recession fears and more could all be bullish elements for the gold market, yet have thus far not shown any ability to provide a sustainable boost.

 

In the big data point of the week, markets are anxiously awaiting Wednesday’s release of the latest Consumer Price Index data. The CPI is expected to show a year-over-year rise of 8.5% for June and could be market-moving if it is grossly under or over estimated. The CPI data could influence the Federal Reserve as well, and might speed up or slow down the pace of further interest rate hikes. A CPI figure that is above expectations could fall into the hawkish camp and may keep the Fed moving more aggressively. A large miss on the figure, however, could have the opposite effect and may lend some credibility to the idea that inflation has already peaked. In this case, the Fed could possibly elect to take a more gradual approach with rates.

 

The markets are also awaiting the next FOMC meeting announcement. The Fed is quite likely to raise rates by another 75-basis points this month as it looks to calm inflation. Markets are now expecting a larger hike. What markets may want to know, however, is what the Fed is thinking about going forward. Will the Fed keep hiking rates more aggressively or could it take a slightly calmer approach? Any clues provided by the central bank about its policy plans in the months ahead may be useful for investors and could send the markets moving up or down.

 

The Fed’s commentary regarding its policy plans may also have large ramifications for the dollar. The greenback has been ascending in recent months largely due to heightened rate expectations. Should those expectations ease or reverse course, the dollar could become very sellable and may start heading lower once again. Dollar weakness could possibly open the door to a reversal in gold as well, as it makes gold cheaper for foreign buyers.

 

The $1700 and $1800 levels remain key for gold for the time being. If the bears are able to produce a close below $1700, the bottom could fall out and a fresh leg lower may be seen. If the bulls are able to take out the $1800 level, it could attract fresh buying interest and possibly fuel a larger market reversal. The market remains stuck in neutral right now, however, and may require some fresh bullish or bearish inputs before making a sustainable move higher or lower.

Another Day Lower

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The gold market is lower again Monday as numerous issues weigh on the metal. A stronger dollar was a large factor in today’s price action as speculative positioning is now close to neutral. Bearish bets on gold have increased recently as hedge funds have dropped the metal, and long specs have seen a dramatic decline that has taken the number of longs in the marketplace to the lowest level in three years. Having become what some might consider overly bearish in recent weeks, the gold market could be ripe for a turnaround as capitulation could be seen soon.

 

Markets are awaiting what will likely be the key data point of the week in Wednesday’s Consumer Price Index, or CPI. The data is expected to be hot, showing a year-over-year rise of 8.5% for the month of June. This would follow the hot reading for May, which showed a rise of 8.6%. The inflation reading for June could potentially be market-moving. A hotter than expected figure could send investors running for the exits in masse. A miss on the data, however, could fuel a substantial tally for stocks and risk assets as it could point to inflation having already peaked. This could alleviate some of the fears over a Fed-induced recession coming this year and could send risk assets sharply higher.

 

Markets are also eagerly awaiting the July FOMC meeting later this month. It is widely expected that the Fed will again raise rates by 75-basis points in an attempt to get a handle on inflation. It is far more unclear, however, what the Fed may do in the coming months. While the central bank could continue to raise rates by 75-points or even more at a crack, it may be more likely for the Fed to take a more moderate approach and raise rates by 25 or 50-points at a time. Whatever the Fed decides to do, or not do, it could have significant effects for global markets.

 

Some analysts have suggested that gold has held up well, given the environment and the dollar at 20-year highs. Other analysts, however, feel that further downside cannot be ruled out and may even be likely. The bears will need to produce a close below the $1700 level to attract fresh shorts. The bulls, on the other hand, need to push prices back above the $1800 level to even get started. The $1900 area may be even more important. A close above this level could attract a fresh wave of buying that could put gold on a sustainable track higher.

 

Gold could be getting ready for a reversal as many other commodities prepare for some mean-reversion. Gold has stood around its 100-week average for the last year or so as other commodity markets have taken off and become arguably stretched. That overbought condition may soon work itself out and could send many commodities lower. Gold could, at the same time, embark on a significant reversal and possibly even embark on a fresh run higher.

A Modest Correction

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The gold market is higher in early action Thursday as the bulls see a slight reprieve from recent selling pressure. Spot gold is higher by less than $5 per ounce, however, and has several hours to maintain those gains for a positive daily close. Gold hit a fresh 8.5-month low this week while silver also hit a 2-year low. Among the bearish factors affecting the metals markets are a stronger dollar (which hit a 20-year high this week) and declining crude oil prices which have fallen below the $100 per barrel level.

 

The gold and other markets have quickly digested yesterday’s release of the latest Fed meeting minutes. Markets are now pricing in a very high likelihood of another 75-basis point rate hike this month. How the Fed elects to proceed after the next FOMC meeting is unknown, however. The Fed will almost certainly continue to raise rates as it sees fit, although the size of those rate increases remains the subject of debate. After hiking rates not once but twice by 75-points, the Fed could easily decide to go a little easier and only raise rates by 50 or even 25-points. The Fed did reiterate its plans and intentions recently, and appears ready and willing to keep raising rates until inflation is under control. Unfortunately for the Fed, that could take an interest rate of 20% or even more, and the Fed is extremely unlikely to raise rates to Volcker era levels to combat inflation.

 

Now that the latest Fed meeting minutes are out, markets will now look forward to Friday’s release of the latest jobs data. The June non-farm payrolls figure is expected to come in at 250,000 jobs added. This would be significantly less than the 390,000 jobs added in May, yet still represented a very solid showing. The jobs data does have the potential to be market moving, however, as it could adjust rate expectations. A much stronger jobs figure could lend credibility to the notion of raising rates aggressively throughout the rest of the year. A weaker than expected figure, however, could alter such expectations and could give the Fed something to think about.

 

The bulls have been smashed this past week and are clearly on their heels currently. Despite today’s very modest gains, the bears remain in frim control on the daily chart and will look to produce a close below the $1700 level in the days ahead. The bulls need to not only stop the bleeding, but also need to take prices back above the $1800 level to attract more interest. In the meantime, bargain hunters may appear and look to scoop up gold at what may later be viewed as highly discounted prices. Although the long-term narrative for gold remains unchanged, the bulls may have to endure some pain ahead before finding some upside. The market is vulnerable to a sharp and rapid rally, however, as numerous bullish issues remain intact and as shorts get heavier and heavier.