The gold market kicked off the trading week on a sour note as risk appetite improved and worries over a recession eased. Spot prices are lower by over $3 per ounce in mid-afternoon action. The metal bulls are attempting to hold their own so far this week, and prices visited both sides of the unchanged mark during the day’s session. Not only are investors a little less worried over a Fed-induced recession today, but recent declines across the raw commodity sector could be pointing towards a peak in inflationary pressures. If that is the case, the Fed may not feel the need to hike rates as aggressively as anticipated and that could potentially be bullish for gold.

 

The Russian/Ukrainian war rages on with no end in sight. It was reported today that Russia had defaulted on its foreign currency obligations. Rating agencies have not labeled a default, however, as they previously withdrew their ratings from Russia. In other news regarding Russia, the Group of Seven nations announced new sanctions against Russia. The sanctions include the banning of Russian gold imports in what could be a significant move. Russia has spent the last several years beefing up its gold holdings,  and if unable to use them could eventually find itself in a financially challenging situation.

 

Outside markets are fairly quiet today. Crude oil is higher, the dollar is lower and yields are steady. While investors may be breathing a tad easier today regarding the outlook for inflation, price pressures do have the potential to increase from here or become entrenched. If they do, it could fuel a major paradigm shift within global markets. Central banks would no longer be able to ignore periods of rising prices and write them off as temporary. Significant price increases could become increasingly extended in nature and could keep central banks from easing policy the way they might otherwise want to. Any way you slice it, a long period of stagflation could be brutal for both the economy itself and households.

 

Markets will need to endure some pain to prevent inflation from becoming entrenched, if it has not already. These pains, such as rate hikes or money supply contractions, are small compared to the pain that could be brought about during an extended episode of stagflation. The next several months could, therefore, be filled with increasing volatility as markets attempt to guess the Fed’s thoughts and how it may adjust policy on an ongoing basis. Some have even suggested the Fed is likely to reverse course by the beginning of 2023, as it succumbs to the pressure associated with driving equity markets and risk assets lower.

 

The Fed needs to stay the current course this time around. Pausing its rate hikes or even reversing course and lowering rates to appease stock investors could lead to stagflation while also eroding any credibility the central bank still has.

The gold market is a bit stronger today. Prices have still not retaken the $1850 level, however, and therefore could remain vulnerable to another wave of selling in the days ahead. Investors today are reacting to some conflicting market fundamentals, including a solid decline in yields and the dollar. Those declines are being offset by a large decline in crude oil, however, and the market had little reaction to Fed Chairman Jerome Powell’s comments today regarding inflation.

 

In prepared remarks, the Fed Chief suggested that the central bank would continue on its current hawkish poath, raising rates as necessary to bring down problematic inflation. The Fed Chief’s remarks were characterized as not-surprising and the gold market did not show much price movement in light of them. Inflation has been a major source of market concern for months now. Despite the Fed’s aggressive interest rate hikes to combat it, it is unlikely the Fed will be able to turn down the heat on rampant price pressures. The central bank may simply end up giving up on inflation and possibly even reversing course, possibly lowering rates again by early next year.

 

While inflation remains a major global problem, gold investors do not seem overly thrilled about buying gold because of it. The market seems to be more interested in the possibility of a recession at this point in time, and what a recession could do to overall demand. Should the U.S. or globe enter a recession, demand for gold could potentially slow significantly. This downturn in demand could have a bearish effect for prices which already appear to be struggling to gain any upside momentum.

 

The gold market has been range-bound for several weeks now and is thus far not showing signs of a breakout or breakdown. While the bulls have been unable to maintain trade above the $1900 level, the bears have also failed to take prices below the $1800 area. These two levels represent the technical keys to the kingdom at this point. A breakout above or breakdown below these levels may signify the market trend for months to come.

 

As the Fed looks to fight inflation in the months ahead, it is likely to become increasingly frustrated. Given current inflation levels, the Fed may be unlikely to have a significant impact on price pressures without going “Volcker” style and raising rates to the 20% level. Such a move seems extremely unlikely at this point in time, but without such a move the Fed may not be able to tame price pressures any time soon. If the Fed elects to stay put or reverse course later in the year, it may potentially avoid a recession but could usher in an extended period of stagflation in which prices remain elevated while employment and economic activity decline. Such a scenario would not be a positive and could, for that reason, lead to strong gold demand and higher

The gold market has seen some significant ups and downs this past year. From riding high on easy monetary policy one minute to being drained on large rate hikes the next, the yellow metal has been all over the place. That trend has dissipated in recent months, however, as the market has maintained a trading range from $1800 to $1900. The bulls and the bears appear ready and waiting to jump on the next significant catalyst which could arrive at any time now. Such a catalyst could take time to develop, however, and the longer it takes the more time the metal may stay range-bound.

 

A big positive for the gold bulls may be last week’s 75-basis point rate hike. The hike was the largest by the Fed in about 30 years and may demonstrate that the central bank is quite serious about fulfilling its mandate to control price pressures. As a positive for the gold bulls, the market held up quite well in the aftermath of the rate hike and is still trading in its recent range. The metal likely held its ground as the Fed may have thrown up a massive red flag when it raised rates by 75-basis points, the largest increase in almost 30 years. The Fed is determined to fight inflation, and in doing so, may become increasingly likely to push the economy into a recession.

 

Although the Fed has signaled that rates could hit 3.50% by the end of the year, investor fear could keep gold in the mix even as yields continue to rise. Fears over the Fed sending the economy into recession may have changed the relationship between gold and interest rates. Gold may still rise, and rise substantially, even as the Fed looks to hike rates to combat inflation.

 

Fears over a Fed misstep may be overdone at this point, and the central bank could still possibly achieve a soft landing despite a narrowing window. The labor market remains healthy, and if Americans are able to hold onto their jobs, a recession can still be avoided.

 

Despite the Fed’s recent action, it remains well behind the inflation curve. Some analysts have argued that the Fed would need to hike rates to the 20% level (As was done in the Volcker days) to get inflation to a tolerable level. This seems extremely unlikely at this point in time, however, and investors may just have to remain nimble and nervous when it comes to what the Fed may be able to accomplish.

 

The market remains stuck in neutral as it sits near the $1850 level. The $1800 and $1900 levels remain key areas of support and resistance. Whichever level is breached first, on a closing basis, could determine gold’s trend for the next several months. The market could, however, spend even more time in its recent range as investors await more moves from the Fed and the effects of those moves to work their way through the economy.

 

The gold market is a bit softer today as the bears look to follow through on recent selling. A stronger dollar and rising yields are the primary culprits today behind gold’s weakness and may continue to limit the metal’s upside in the weeks ahead. Another hot reading on inflation today has done little if anything to help the bulls.

 

The Producer Price Index was released today and showed a rise of 10.8% year-over-year. The index showed a .5% rise from April figures and the readings were basically in line with market expectations. Markets showed little reaction to the data, therefore, as inflation remains a hot topic. Despite the muted reaction to the PPI data, inflation is in fact running very hot across the globe and may be a bullish factor for gold and metals over the long-term.

 

Although the PPI data is important, the main  area of focus for this week is the FOMC decision due for release tomorrow afternoon. The Fed began their policy meeting Tuesday morning and will wrap it up with a decision on policy Wednesday afternoon. It is widely expected that the Fed will raise the Fed Funds Rate by 50-basis points tomorrow. The Fed is also likely to do so at its next meeting as well, and possibly even beyond that. Some analysts believe the Fed could even hike rates by 75-points this week. Fed Chairman Jerome Powell is set to hold a press conference after the decision and investors are likely to pay close attention. Powell could provide clues about the Fed’s outlook and its plans going forward.

 

Outside markets are not doing much to help gold today. Crude oil is higher, trading at over $122 per barrel. The Dollar Index is also stronger on the day, trading not far from the recent 20-year highs touched earlier. Yields for the benchmark Ten-Year Note are at 3.3%, not far off from recent 14-year highs reached at 3.371%.

 

The bears remain in control of gold on the daily chart. The bears will look to produce a close below technical support at $1800. A close below this level could spell trouble for the market and a fresh wave of sellers could potentially enter if the market closes below this level. The bulls will look to first take out the week’s highs around $1882 and then produce a close above the $1900 level.

 

The Fed meeting and policy decision Wednesday has the potential to move markets, and move them dramatically. Should the Fed take an even more hawkish tone, it could send stocks sharply lower while also weighing on gold. Should the Fed sound more dovish, however, both stocks and gold could potentially rally. At risk also is upside for the Dollar Index which has been moving higher on the notion of higher rates. A weaker dollar could put the gold bulls back in the driver’s seat and could send the market back towards resistance.

The gold market is still not far from the $1850 level and could remain very subdued until next week. The FOMC meeting will take place next week and the announcement on policy is expected at its conclusion Wednesday afternoon. The three-week holding pattern that gold has been stuck in could continue until that day. Prices have been stuck in neutral as investors may

be awaiting more clarity from the Federal Reserve on its plans moving forward.

 

The CME Fedwatch tool currently shows a greater than 90% likelihood the Fed will again raise rates by 50-basis points next week. The Fed has suggested that it will likely raise rates by 50-points at its next two consecutive meetings while markets have priced in the Fed doing so at the next three consecutive meetings. What’s at stake with next week’s meeting? A lot. For starters, the Fed will need to keep its credibility and thus hike accordingly as it has suggested it will do. Although there may be some significant knee-jerk reaction to the Fed announcement, it is also very important for investors to remain focused on the bigger picture.

 

Friday’s Consumer Price Index data may shed some light on the bigger picture. Inflation is expected to show a year-over-year rise for May of 8.2%. This would indicate a slight drop from April’s reading of 8.3% and could add more credibility to the notion that inflation may have already peaked. Should the figure come out higher than expected, however, the Fed could see it come under serious pressure to hike even more aggressively and drain liquidity from the system. In such a scenario, markets would be unlikely to take the news well and could find themselves being sold heavily. In that case, gold could stand to benefit as investors may look for perceived safe havens in which to put capital to work in. Even if the CPI data does suggest inflation has peaked, no one knows how long it may take for prices to back down. Inflation could be problematic for some time. Any missteps by the Fed during this period could be catastrophic and could lead to an extended period of stagflation or even a recession.

 

The Fed has a lot to deal with currently and is on very fragile footing. Having backed itself into a corner, the central bank may look to leave its options as open as possible while it tries to navigate the rough economic waters. Adding to the Fed’s problems, the war in Ukraine is showing no signs of a slowdown as of yet and the stock markets remain in downtrends despite some recent rallying.

 

The $1800 and $1900 levels remain key for the bulls and the bears. Whichever way prices eventually do breakout, they are likely to continue moving in that direction for the months ahead. The dip has been purchased so far, however, the bulls just need a little more strength to establish a fresh trend higher.