Outside Markets And Bearish Charts Keeping Bulls Quiet

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The gold market is lower Monday as bearish outside market action and bearish charts take a toll on sentiment. A stronger U.S. Dollar Index as well as a rise in treasury yields are pressing gold today as recently deteriorated chart posture also plays a role. Despite these factors, gold is only down by $2 per ounce in late morning trade.

 

The Fed has maintained its hawkish stance for some time now. Many are now wondering if the central bank will raise rates again at its next meeting set to take place in June. Earlier today, Minneapolis Fed President Neel Kashkari said the Fed is determined to bring the inflation rate down to 2% annually. He did say, however, that he was unsure if the Fed would raise rates again next month. If the Fed does decide to not raise rates again in a few weeks, it could prove to be nothing more than a hawkish pause before the Fed continues its rate raising. The Fed has seemingly been unable, thus far, to show any major signs of taking a more dovish approach to its policy. While inflation has calmed down in recent months, it remains far above the Fed’s desired rate of 2% annually and may need even higher rates to bring it down further.

 

As long as the Fed maintains its hawkish posture, the gold market may see limited upside from recent levels. The dollar may see strength and that could also weigh heavily on gold if the currency is able to maintain higher ground. The gold bulls may be able to keep the market around the $2,000 level for now, but will eventually need a fresh catalyst to take prices higher on a sustainable trajectory. A breakout above the $2,000 level, on a closing basis, could set the stage for the bulls to take the market higher, possibly back to previous all-time highs. If the bulls fail to keep the market near the $2,000 level, however, the bears could find themselves in increasing control of the market and could eventually take prices down to $1900 or lower.

 

The U.S. is rapidly approaching the deadline for its debt ceiling. President Biden and Speaker McCarthy are meeting today to discuss the matter and hopefully will make some progress as negotiations move forward. A U.S default, which could take place in early June, could be catastrophic for the global economy and could put the U.S. economy into a deep and prolonged recession. Although a default could be terrible for the U.S. and its currency, it could also be highly bullish for gold and could propel the metal well into fresh all-time high territory.

 

In the meantime, the gold bulls still have the technical advantage but are fading quickly. If that advantage is lost, the bears could very well drive the market lower quickly, and a test of the $1900 level could be seen in short order.

Heard It Before Will Hear It Again

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The gold market is solidly lower Tuesday and has now declined below the key $2,000 level.  Talks on the debt ceiling are ongoing, buyout markets appear to be getting increasingly nervous about the potential for a default. U.S. Treasury Secretary Janey Tellen today described a severe downturn, millions of unemployed, and a stock market decline of some 45% to paint a picture of what a default could lead to.

 

Yellen stated that a U.S. default would generate a financial catastrophe. A global panic could ensue that could lead to massive margin calls, bank runs, and fire sales in assets. The dollar has already been under some degree of pressure in recent months and years as global players look to move away from it as the preferred global reserve currency of choice. A debt default could very well sink the dollar completely, and the currency could quickly lose the majority of its value. This decline in value could send investors and market participants into viable alternative currencies, such as the Chinese Yuan.

 

The gold market, although lower today, could get bought up rapidly as a dollar alternative. Unlike the dollar or the yuan, the gold market does not carry any counterparty risk at all. A default by the United States would give gold investors that much more reason to buy and the market could easily exceed its previous all-time highs. As concerns mount over the potential for a U.S., default, the banking system is also being closely eyed for more signs of trouble.

 

Bank failures have fed fears of a major banking system collapse in recent months. Although the failures have not yet spread significantly, the fears that they could remain a key market focus. A U.S. debt default could very well be the trigger that sends the banking system into a major collapse, as depositors look to pull funds as quickly as possible. This rapid fund withdrawal could be more than many banks can stand and could fuel a widespread failure rate in banks that could be disastrous for the nation and the economy. Without question, much hangs in the balance currently as President Biden and Speaker McCarthy continue their talks.

 

A U.S. default could have major implications for monetary policy as well. The Federal Reserve would have little choice but to begin cutting rates aggressively to combat the likely recession that could occur. Inflation, which has been a problem for some time, could accelerate once again if rates are taken down. The country could find itself in a scenario of rampant inflation with little to zero growth. Such a scenario would be disastrous for the nation and could take years to undo.

 

The gold market is likely to try to remain near or above the $2,000 level as these concerns mount. Any significant dips in gold may be bought aggressively by long-term investors seeing the forest through the trees.

Is The Fed Ready To Take A Pause?

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The Federal Reserve has been busy raising interest rates for some time now. After hiking interest rates at the fastest pace since the 1980s, the Fed may now see fit to take a breather. Recent data shows inflation easing for a 10th month, and that lighter inflationary data may give the Fed the green light to take a pause from rate hikes.

 

The Consumer Price Index, or CPI, rose 4.9% in April. The 4.9% rise from the year earlier was the smallest increase since April 2021. On a monthly basis, prices rose by .4% compared to a rise of .1% in March. The monthly rise was driven primarily by the cost of fuel, used vehicles and housing. Despite the annual rate of inflation falling by nearly half since June, the rate is still far above the Fed’s desired target of 2% annualized. The rate hikes that have taken place over the last several months are still working their way through the economy, however, and may continue to clamp down on price pressures in the months ahead.

 

The easing of inflationary data is likely to give the Fed reason to pause. Concerns over a recession have been on the rise again in recent months, and as long as the Fed is raising rates the likelihood of a recession may increase. The Fed standing ;pat on rates, however, may give the economy some breathing room and could prevent a recession from occurring.

 

Stocks remain not far from all-time highs and the markets could potentially stage a comeback if the Fed signals no more rate hikes are forthcoming at this time. Such a signal could arrive at the next FOMC meeting or even through Fed official commentary beforehand. Investors will be paying close attention to any details or plans from the Fed, as the central bank could be the main driver of market action in the summer months.

 

The gold market is still highly bullish, with the bulls maintaining control of the metal. The bulls need to target and take out the $2100 level on the upside. The bears, on the other hand, need to target and produce a close below the April lows around $1965. Price action between these two levels may be indicative of back-and-fill trade before the market attempts to make another run higher. The gold market may already find itself within the summer doldrums, however, as the Fed looks to pause and as the headline cycle quiets down.

 

The possibility of further deterioration between the U.S. and China may keep gold investors in the market. China has been stockpiling a significant amount of gold bullion for some time now, and some believe that China is gearing up for a move away from the dollar. If China were to move away from the dollar, it could pave the way for other nations to do the same. Dollar weakness due to rising supply and declining faith in it could put gold into major rally mode, possibly sending the metal to fresh all-time highs.

Bulls Off To A Slow Start

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The gold bulls did not show much enthusiasm Monday as spot gold prices declined by nearly $10 per ounce. Spot gold now sits around the $1982 level as the bulls have faded further following recent selling in the metal. Some better-than-expected U.S. economic data also played a role Monday as ISM manufacturing data showed a stronger-than-expected figure for April. Construction Spending also beat market expectations Monday morning, and the two data pieces together proved to be more than the gold market could bear.

 

Some safe-haven demand was seen in gold earlier in the session Monday. Over the weekend, the FDIC was forced to step in and shutter First Republic Bank, making it the second-largest bank failure in U.S. history. J.P. Morgan stepped in to buy the bank’s assets and its CEO, Jamie Dimon, provided some reassurance to markets earlier in the day. Dimon stated that the U.S. banking system is very healthy and likely put to rest some rising concerns over the safety of the banking system. Those concerns may rise again, however, if another bank fails or appears to be on the verge of failure. With several large failures having taken place in recent months now, the threat to the system is far from over.

 

Investors will turn their attention to the FOMC meeting this week. The meeting begins on Tuesday and concludes on Wednesday. It is widely expected that the Fed will hike interest rates again by 25 basis points. The European Central Bank (ECB) also meets this week on Thursday and is also expected to hike rates by a quarter point. Today’s stronger data may only reinforce the policy hawks and could give the Fed reason to raise rates further without too much thought. The question after another rate hike this week is what the Fed may see in store for the months ahead.

 

With many investors expecting the Fed to hike this week and then enter a holding pattern, the data stream may become even more closely scrutinized. Any significant beats or misses in the data could give markets reason to think the Fed will hike rates even higher or could begin to start easing rates. With the risk of recession lingering around, the Fed may be more likely to begin lowering rates than trying to push the envelope even higher. Any signals that rates could be taken lower may fuel buying in stocks and gold. Any signals that rates could go even higher may have the opposite effect, however, and could send gold and equity markets sharply lower.

 

For the time being, the gold bulls remain in control on the daily chart. The bulls will need to stabilize the market and prevent further erosion lower, however, to maintain that control. The bulls need to eye the April highs around $2063 and take them out on a closing basis if the rally is to continue.