The War Watch Continues

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The gold market is trading slightly higher around lunchtime Tuesday as things heat up further between Russia and Ukraine. Gold traded up to an eight-month high today as risk aversion has again set in and as investors seek out perceived safe-havens. Constructive charts combined with the geopolitical scene are making it easy for investors to buy gold. Positive momentum could carry the metal higher as it faces an important test of technical resistance.

 

Investors and traders returned from a long holiday weekend to see that Russia is now putting troops into breakaway parts of Ukraine. Russia has called the move a peacekeeping mission, although that description has left the U.S. and its allies scratching their heads. The U.S. and its allies have already initiated sanctions against Russia. Germany has halted certification of a major oil pipeline into Russia, yet Russia appears to be intent on invading Ukraine. According to the U.S. Russia now has nearly 200,000 troops stationed along the Ukraine border. It is difficult to imagine a reason for such a buildup that does not include an invasion of Ukraine by Russian forces.

 

The rising Russian/Ukraine tensions are having an effect on global markets. Crude oil prices shot higher overnight, hitting a 7.5-year high of $96 per barrel. The stock markets are also being hit today. The benchmark Dow Jones Industrial Average is down nearly 600 points in the early afternoon. With a couple of hours left in the trading day, volatility and selling could take over and fuel a massive down day for equities that could lead to declines of several percentage points. The dollar is steady at mid-day, while yields on the Ten-Year Note are currently fetching some 1.925%. Yields have declined from recent highs over the 2% level as safe haven buying has lifted demand.

 

The gold market has backed off from overnight highs. Given the metal’s demand from buyers looking for safe havens, it is not surprising that it is off of overnight highs. Some traders and investors likely decided to take a quick profit. There is almost certainly a significant amount of risk premium built into the price of gold currently, and if tensions start to calm the market could see a sharp pullback.

 

The bulls remain in firm control of the market on the daily chart and a steep uptrend is in place. The bulls next target is producing a close above the May 2021 highs near $1923 per ounce. If this level is cleared, the market could really pick up significant steam and could possibly rocket higher to $2000 or beyond in short order. The bears, on the other hand, will still target a close below the $1800 level as a starter with the $1780 area next. Although the metal is still in no man’s land, it does appear to be inching higher and the bulls may have the advantage in the weeks and months ahead.

Gold Sees Mild Pullback To End Exciting Week

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After some exciting upside that saw gold reach $1900 per ounce late this week, the yellow metal pulled back slightly Friday as traders likely chose to book some profits. Although gold finished the day session down, it did not end up at the lows of the day as buyers seemingly stepped in to buy the dip. The metal may have also been bought off the session lows as traders eyed Ukraine nervously heading into the weekend.

 

Stocks have seen some movement to end the trading week as well. In late afternoon action, the benchmark Dow Jones Industrial Average is down nearly 200 points. Today’s equity declines come on the heels of major declines in yesterday’s session. The bears are in control of stocks on the daily chart currently, and the path of least resistance is sideways to lower prices.

 

Dominating the financial headlines this week was the possibility of a Russian invasion of Ukraine. Russia has amassed some 150,000 troops along the Ukrainian border and it is difficult to imagine why the country would park such a large force there if it did not intend to invade. The U.S. has said that it believes an invasion is imminent. Any increases in hostilities over the weekend could have dramatic consequences for markets when they reopen Sunday evening. While the U.S. has intelligence that Russia plans to invade, Russia has said it has no intention of invading its neighbor. Adding to global anxiety over the potential for armed conflict, Russia today announced that it will be conducting nuclear drills.

 

The biggest wildcard for this situation now is how an invasion could be responded to. The U.S. and its allies have suggested that further sanctions against Russian interests could be administered, but the possibility of a ground war is the biggest concern. Any U.S. response to an invasion of Ukraine would likely depend on the severity of the invasion. If Russia sends all 150,000 troops into Ukraine at once, a response could be swift and severe, leading to an armed conflict the likes of which has not been seen in some time. A smaller incursion of Russian forces, on the other hand, may only garner additional sanctions or another economic punishment as a deterrent.

 

Markets are not only concerned about a possible war, but are also very worried over ongoing inflation pressure. This week saw several “hot” inflation reports, suggesting that inflation may now be entrenched and it could take some serious time and action from central banks to reverse it. The first such action is very likely to happen in the coming weeks. The Fed could be gearing up for a half-point interest rate hike next month or possibly sooner. This would be the first such hike since 2000 at which time the dot.com bubble popped. Stocks could react in a very similar fashion this time around as well. The bears are already pushing equities lower and the path of least resistance remains sideways to lower.

Gold Hits $1900

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The gold market is having a strong upside day as prices have hit the $1900 level before taking a breather. The eight-month high in price is likely due to increasing risk aversion as worries over Russia and Ukraine mount further. Risk tolerance is sharply lower today as a Russian invasion of Ukraine appears to be imminent. President Biden also gave a somber update of the situation earlier today. Russia not only appears to have not removed any troops as was previously thought, but appears to have added several thousand more along the border.

 

The possibility of a Russian invasion is a major source of global concern. It is unclear how the U.S. and its allies might react to an invasion, but a full-blown ground war does not appear to be out of the question. Such a military conflict could be on a grand scale and could change U.S./Russian dynamics for some time to come. The worry over a Russian conflict comes at a time when markets are already grappling with several other worrisome issues, including inflation and the potential for higher interest rates.

 

The gold market is seeing benefit from several different angles currently and combined those angles have significant power to move the market. The threat of military conflict, inflation, weaker than expected economic data and a slowing economy are all likely providing gold some lift while weighing on stocks and risk assets. As the hawkish Fed begins to tighten rates next month, the central bank could run the risk of putting the economy back into a recession. It appears that the Fed currently believes inflation to be the greater risk, however, and as such it will act accordingly. Multiple rate hikes coupled with a balance sheet contraction could, however, be too much for markets to bear. As investors flee stocks and risk assets over the next several months, much of that capital could find its way into the gold market as investors seek out alternative asset classes to put capital to work in.

 

The gold market may face another key upside test in the days ahead. Although the metal has had a good run up today, the real test may be in the $1903-$1923 range. This $20 zone may act as a major upside buffer and resistance zone, and could leave the bulls frustrated and tired. If the market is able to surpass the $1923 area on a closing basis, however, the stage could be set for a rapid and sharp rise higher. Such a move could extend to previous all-time highs or beyond. With little, if any, chart resistance in the way, the bulls could potentially have a field day taking prices higher.

 

An escalation of Russian/Ukrainian tensions could potentially drive gold through upside resistance in short order. If tensions calm over the next few days, the bulls may elect to take some profits and the market could enter a back and fill mode for a bit. Either way, the bulls are now in firm control of the daily chart and any dips are likely to be aggressively bought.

Gold Down As Inflation Up

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The gold market is seeing some moderate selling today as geopolitical tensions have eased-at least for now. The yellow metal is down today despite the latest reading of the Producer Price Index registering a sharp rise from a year ago. The index showed a rise of 1% from the previous month, with a rise of 9.7% from last January. Estimates were looking for a rise of .5% month-over-month and 9.1% year-over-year. Needless to say, today’s PPI data beat estimates by a wide margin and reinforced the idea that the Fed is clear to begin hiking interest rates at any time now.

 

The PPI data showed inflation is everywhere as it covered a wide variety of categories. Not only is inflation everywhere, but it also appears to be gaining momentum. This inflationary momentum may give credibility to the idea of the Fed hiking rates by a half-point next month rather than just a quarter-point hike. The last time the central bank hikes so aggressively was in 2000. That half-point rate hike signaled the end of the dot.com stock rally as equities proceeded to decline significantly over the following years.

 

Whether this time around will bring a similar fate for stocks remains unclear. The Fed has seemingly gone out of its way to avoid upsetting stock investors in recent years, allowing rates to remain at or near zero when perhaps it should have considered a rise more carefully. Despite any bearish effects the Fed hikes may

have for stocks and risk assets, the Fed now finds itself pinned firmly into a corner from which there is no easy escape. If the Fed does not raise rates aggressively at this point, inflation could become really out of control. If the Fed does hike rates aggressively as many feel it should, it does risk a major trend reversal in equities with the possibility for heightened volatility and a major sell-off. The months ahead could, therefore, be filled with major stock selling, rising volatility and a general risk-off mentality. Such a market environment could potentially lead to higher gold prices as investors seek out alternative places to put capital to work.

 

The gold bulls have done well in recent weeks but their work is far from done. After finally breaching the $1850 level on the upside just yesterday, the yellow metal has fallen back to it today. We expect this level to hold-at least for today-and it could invite some who missed the rally yesterday to jump onto the bandwagon. If the market is unable to hold above the $1850 level, however, trouble could be on the horizon. A close below $1850 followed by a close below $1800 will likely be the bears’ next targets. The bulls, on the other hand, will look to take prices back to last week’s highs near $1870. Market movement between these levels may be viewed as noise and may not attract much buying or selling.

Prospects of War

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The gold bulls are out in force Monday as spot prices have risen above key resistance. Gold is now sitting around $1865 in late morning trade and appears ready to close above the $1850 level. Today’s strong showing may pave the way for further gains in the week ahead and may also entice short-term momentum traders to jump on board. A mix of geopolitical and inflation jitters is the fuel for the fire today and may continue to act as such in the weeks and months ahead.

 

The trading week started off on a risk-off mentality this morning as stock markets opened under pressure. Not only are investors concerned about inflation hitting a 40-year high, but they are also watching geopolitical developments across the pond. Russia appears ready to invade Ukraine any day now, and if it does, it is unclear how the United States might react. The U.S. could simply slap more sanctions on Russia or could counter with a full-blown ground war. The unknowns surrounding Ukraine are a source of market tension right now and may boil over if Russia does in fact invade the nation.

 

With no major economic news due for release today, markets are paying close attention to the bigger picture. Crude oil, the dollar and the 10-Year Note yield are all higher today, furthering concerns over inflation. Investors may have more to worry about tomorrow concerning price pressures, as the latest data on producer prices is set for release Tuesday. A hot PPI reading could cause dramatic volatility and selling in the days ahead. Any reading over the expected rise of .5% is likely to be viewed as extremely inflationary and could even cause the Federal Reserve to take emergency action before the expected rate hike in March.

 

Gold hit a three-month high today and could be poised for more gains in the days ahead. With key resistance now breached at $1850, the market may find little standing in the way of a return to previous all-time highs or beyond. Of course, gold’s fortunes over the next several months and years may depend on several key factors, including the Fed’s monetary policy decisions and geopolitics. Currently, the market is seemingly in a bullish position. Even if the Fed does hike rates harder or faster than expected, the gold market may continue its ascent if inflation remains problematic. Not only that, but gold has risen during previous tightening cycles and there is no reason to believe it won’t do the same during this cycle. The $1882 area (November high) is likely the next level to test for the bulls. The bears will look to take the process back down to below $1800 as a starting point. Price action between these two areas is likely just noise but could exist for some time. Until a breakout does develop, bargain hunters may step in to buy any significant dips in price.

Will Inflation Expectations Push Gold Higher?

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The worries over inflation have not abated in recent months. These concerns, rather, have increased significantly in recent weeks. Yesterday’s CPI reading of 7.5% and a core reading of 6% are the highest seen since 1982. The hotter than expected inflation data is shifting Fed expectations and may cause the central bank to hike rates faster or stronger than previously thought. Fed Funds futures are now pricing in a very strong likelihood of a 50- basis point hike in March rather than a 25- basis point increase.

 

A 50-basis point hike is significant for a few reasons. The Federal Reserve has not hiked rates by a half-point since the year 2000. At that time, the rate hike marked the end of the dot.com bubble which then saw markets decline significantly. Whether this time around has similar effects remains unknown. The Fed hiking by a half-point, however, is akin to the Fed unleashing a bazooka. Such a shock and awe type of move from the Fed is not unlikely, however, given how far the central bank has fallen behind the inflation curve. The question is what is the Fed willing to give up in return for a shock and awe rate hike? Such a move would almost certainly have an immediate and sharp bearish effect on the economy. Stock investors could quickly head for the hills, and equity markets could potentially see a sudden reversal or sell-off. Volatility would also likely increase substantially, and the markets could enter a prolonged period of heightened volatility as investors attempt to reprice assets and interest rate risk.

 

The bond market appears to be pricing in a half-point hike next month. The gold market seems to be on the fence, however, and does not appear convinced the Fed will take such action in a few weeks. The gld bulls, in fact, are pushing prices higher today, inching closer and closer to key resistance in the $1850 area. An upside breakout of this level on a closing basis would likely attract further buying interest and could set the stage for a rapid rally higher towards previous all-time highs or beyond. A failure of the bulls to take this level out, however, could potentially set up a sharp and significant leg lower. The bears are looking to take prices below the $1800 and then the $1780 levels on a closing basis. Success in doing so could mark an important turn for the market, and remaining bulls may become far more likely to throw in the towel at that point.

 

The next several weeks until the March Fed meeting may see volatility on the rise as expectations are repriced. That volatility could be settled down, however, if the Fed provides useful information at its March meeting. The central bank will have to offer an explanation if it hikes by a half-point rather than a quarter-point. If the Fed does a good job of laying out how it plans to proceed, markets may find some respite and calm. If the Fed leaves more unanswered questions, however, or lacks any real clarity in its remarks, look out below. Stocks and risk assets could fall hard and gold could potentially stand to benefit as investors seek out alternatives that may offer protection from inflation and preserve purchasing power.

Inflation is Hot and Getting Hotter

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Inflation has been the talk of the town for months now. Inventory shortages, supply chain bottlenecks and other issues have all been linked to the steep rise in  U.S. inflation in recent months. Inflation has become so problematic at this point that even the Federal Reserve has acknowledged it after saying it believed it was only transitory in nature for a long period of time. Today’s latest reading of the Consumer Price Index only adds credibility to the argument that inflation is entrenched and here to stay. The gauge registered its highest reading in decades today, showing an annual price rise of a whopping 7.5%.

 

The 7.5% reading was above consensus estimates for a rise of 7.2%. The hottest inflation reading in some 40 years has put pressure on both stocks and the metals complex. The data falls clearly into the camp of the policy hawks, who want to see the Fed act aggressively with multiple rate hikes to battle rising price pressures. The reading also fueled a spike higher in treasury yields which is also adding pressure to the metals in early morning action. The benchmark 10-Year Note is currently fetching a yield of 1.994%, its highest yield in over two years.

 

The notion of runaway inflation is not new nor should it be discounted. The Fed has seemingly been well behind the inflation curve for some time now. The central bank could, therefore, be forced to act far more aggressively than previously anticipated. This aggressive action could come in several forms, including a faster pace of more rate hikes or a stringer hike to begin with. The Fed has not made a half-point rate increase since 2000, at which time the dot.com bubble burst and stocks went sharply lower. Some analysts have suggested that hot inflation could pave the way for the Fed to hike rates by a half-point in March rather than the standard quarter-point rise. While such a move could potentially help ease the rise of inflation, it is not without risks. Stock markets, for example, do not love the idea of higher interest rates. The era of free, easy money has been a major contributor to stock market upside in recent years, according to some, and without it the equity markets could potentially see a major slide and trend reversal.

 

Although gold is slightly higher this morning, the metal may remain range bound until the Fed does actually take action. The metal could see a rise during this tightening cycle as it has during previous tightening cycles, and moderately higher interest rates may not be enough to halt buying interest in the yellow metal. The bulls are not far from a key level they must breach. A close above the $1850 area could indicate a fresh leg higher for gold. The bears are targeting a close below $1800 and $1780. A close beneath these levels could set the stage for a fresh leg lower.

Bulls Gaining Some Ground

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As the new trading week gets underway, the gold bulls are seeing some further bullish momentum. Spot gold prices are up $12.80 per ounce today as equity markets see some afternoon buying. Inflation worries appear to be the primary driver of market action today. With corporate earnings generally being quite strong, investors today are continuing to digest last week’s non-farm payrolls data which was stronger than expected. The better than anticipated jobs data may act as a green light for the Fed to begin hiking interest rates next month and could pave the way for a series of hikes this year.

 

The Fed raising rates in just a few weeks time has markets worried but not overly so, at least thus far. While the Fed has already penciled in three interest rate hikes for 2022, many analysts believe the central bank will be forced to hike rates at least four times, possibly even more. Of course, the pace of any Fed rate hikes will likely largely depend on inflation and whether price pressures abate at all in the weeks and months ahead. Recent data would seemingly suggest, however, that price pressures may continue to rise and run rampant. The Fed seemingly has realized it is well behind the inflation curve already, and the central bank may act far more aggressively, therefore, than previously thought.

 

An increasingly aggressive Fed is not necessarily a bad thing for gold. The gold market has risen through previous rate hiking cycles and there is no reason to believe that this time around will be any different. The Fed tightening could affect stocks and risk assets, however, and may lead to a long period of heightened volatility and major stock sell-offs. A full-blown trend reversal is also a strong possibility. As equity markets come under increasing pressure, much of that capital could find its way into the gold market as investors seek out alternative places to put money to work. Such a scenario could, in turn, act as a major catalyst for higher gold prices, possibly even driving the metal into fresh all-time high territory.

 

In addition to the threat posed by inflation and the Fed, markets will also continue to monitor the crude oil market, the dollar and other geopolitical issues. Although it is trading lower today, crude oil prices are now firmly in the 90s and many feel that $100 per barrel oil will be seen soon. While stronger crude may be partly due to the inflationary environment, it is also the “leader” of

the commodity sector. Higher oil may, therefore, drag other commodities higher as well along with it. This could feed into the current inflation narrative and force investors to seek out asset classes that may provide protection and preserve purchasing power. It is difficult to imagine such a scenario in which the value of gold does not increase and increase substantially.

 

In the meantime, the bulls will look for a close above the January highs in the mid- $1850s while the bears will target a decline to the January lows around $1780.

Gold Holding Above $1800

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The gold market Has seen some reversals today as overnight gains were wiped out following the surprisingly strong jobs data for January. The market has since recovered, however and is back in positive territory, albeit not by much. Spot gold prices are currently up less than $2.50 per ounce. The important thing today, however, may be the metal’s willingness to hold above the key $1800 level.

 

The January Non-Farm Payrolls data released this morning showed a much stronger rise in jobs compared to consensus estimates. While estimates were looking for a rise of 150,000 jobs, the report showed that jobs rose by some 467,000. The January unemployment rate was at 4%, and other internal components of the report were also stronger than anticipated. Like it or not, the report may provide some credibility for the Fed and its plans on raising interest rates beginning as soon as next month. The jobs data is definitely hawkish and may back up recent hawkish Fed rhetoric.

 

Although gold and other markets have plenty of issues to consider currently, central banks and their monetary policies remain at the center of attention. Thursday’s ECB meeting was viewed as being more hawkish, with commentary from its President, Christine Lagarde, being seen as increasingly hawkish. The rise in hawkishness from the ECB seems to be following the recent rise in U.S. hawkishness. If inflation continues to be a problem or increases further, central banks may become even more aggressive both in rhetoric and action. This could potentially lead to a more rapid rise in interest rates than expected or more rate increases than previously thought. Whether central banks hike more, faster, or both, the notion of rising rates could spell trouble for equity markets and risk assets.

 

The crude oil market may provide gold with a boost in the weeks ahead. Crude is trading higher today to finish off the trading week and is now valued at a seven-year high. With crude now at nearly $92 per barrel, traders are likely eyeing the $100 level as the next stop and prices could see a continued push until they get there.

 

The daily charts show a slight bullish advantage. The bulls will need to target first resistance around $1825 followed by a test of resistance in the $1850 area. The bears are looking for a decline to the $1775 level followed by a run lower to the December lows.

 

With the yellow metal holding above the key $1800 level, the bulls will need to act and act soon to avoid a bearish decline. The patience of longs within the market could eventually run out, otherwise, and many could throw in the towel if gold is unable to make any further advancement. With interest rates set to possibly rise as soon as next month, volatility could possibly see an increase as investors and traders square positions ahead of any moves by the Fed. The gold market has risen during past tightening cycles, however, and there is no reason for it not to do the same during this cycle.

May More Forecasts Be Lowered?

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The gold market is seeing some shifts in expectations for the year ahead. Rising inflation, an increasingly aggressive Fed and other factors may all have significant effects on gold and could keep it on the defensive in the year ahead. The gold bulls did make some upside headway today, however, as they look to distance the market from key $1800 level. Spot prices are up nearly $6 per ounce in late afternoon action, now sitting at $1806 and change.

 

Market expectations for gold have seen some significant shifts in recent weeks as market dynamics have been changing. Scotiabank today lowered its gold forecast for 2022 to $1800 per ounce. The bank reportedly sees Fed tightening of monetary policy as a major hurdle to higher gold and believes that gold is likely to maintain its recent range throughout 2022.

 

Scotiabank’s Tuesday report highlighted the notion that the Fed is looking to hike more and faster than previously anticipated. Markets may now, in fact, be pricing in five rate hikes rather than the three the Fed currently has penciled in. The Fed has also set up plans to shrink its balance sheet as well and the combination of that and rising rates may keep the gold bulls limited.

 

Although rising interest rates may provide some headwinds for the gold bulls, the metal is unlikely to see a major price route this year. Problematic inflation is likely to keep a solid floor underneath the gold market as the year progresses, regardless of how high rates may get lifted. In addition to inflation, the bulls may also be able to rely on general market uncertainties and the potential for an equity market sell-off or reversal.

 

The downgraded forecast from Scotiabank may not be the last downgrade. More banks may decide to shift their market expectations as well in the weeks ahead. Of course, just how far the Fed may be willing to go remains unknown. The Fed has sounded considerably more hawkish in recent commentary. The Fed has sounded increasingly hawkish before, however, and elected not to act upon their hawkish rhetoric. If the Fed does not follow through on rate hikes this time around, however, inflation could spiral out of control and leave the Fed grasping for a solution. The Fed seems to understand it is already well behind the inflation curve and it does not appear willing to risk a major price ascent from current levels.

 

Despite some recent selling, the gold bulls still have control on the daily chart. That control could be considered quite fragile, however, and they will need to demonstrate further strength and do it soon to maintain that control. With the market back above the $1800 level, the bulls will again target a run towards resistance in the $1850 region. The bears will look to take prices back below the $1800 level and then try for a close below support at $1775. Whether the bulls or bears win the next round, it could potentially lead to an extended move in that direction.