The gold market is seeing some buying Tuesday as the metal bounces back from the significant sell-off seen on Monday. After a poor start to the trading year, gold is attempting to hold its ground higher Tuesday as some key pieces of economic data missed expectations. The yellow metal is holding above the key $1800 level in what may be viewed as a sign of strength.

 

The latest reading of the ISM Manufacturing Index was a disappointment this morning, coming in at a reading of 58.7% last month. This figure represents a nearly 2.5% decline from November’s data and also fell short of expectations for a reading of 60%. Despite signs of an improving labor market, the report did note the challenges being faced by companies as the effects of supply chain constraints remain strong. Manufacturing is being affected by a variety of Covid-related issues including parts shortages, worker absenteeism, overseas supply chain issues and high worker turnover. Despite these issues, however, the strength of optimism being seen remains high.

 

The survey captured economic activity at the end of the year. It was likely done too early to measure the impact of the Omicron variant, however, which may take several weeks to capture the effects of supply disruptions and other factors. Manufacturing could potentially slow, significantly, if the opaque of the variant spread is not slowed. New cases of over 1 million per day, for example, could greatly inhibit the pace of manufacturing and could send the economy into recession.

 

The economic data stream is likely to remain an important factor for the gold market. As the Fed prepares to begin hiking interest rates this year, it seems as if an increasing number of analysts believes the gold market will be unable to withstand the changes to monetary policy. Some analysts have suggested that gold prices are likely to decline to pre-pandemic levels over the course of the year, as an unwinding of the Fed’s super accommodating policy will be viewed as strongly bearish for the yellow metal. Of course, time will tell if this in fact proves to be the case. A very weak period of economic data could, for example, give the Fed reason to reconsider its plans regarding policy. The central bank will already be forced to walk a tightrope of sorts as it looks to normalize policy, attempting to avoid any major equity market disruptions along the way. A streak of weaker data could pave the ebay for the Fed to keep interest rates at or near current levels. Doing so may also help it avoid any major equity sell-offs or a trend reversal in equities. While doing so may keep a floor under equity markets, it could also be viewed as being highly bullish for gold, as there may be no significant changes in opportunity cost.

 

The bulls remain in control on the daily chart. Their uptrend will need to be verified soon, however, or the market may see an increasing risk of reversing course. The bulls will target resistance in the $1840 area while the bears will look to take process below $1775 to gain momentum.

The gold market has certainly seen some ups and downs in recent months. Worries over inflation, dollar weakness and uncertainty over central bank policies have all been bullish for gold. An increasingly hawkish Fed has, however, pierced that balloon of bullishness and let out much of the air in recent weeks. The Fed has not only announced its plans to begin tapering its monthly security purchases but has also now said it will look to wrap up those purchases at a faster pace than expected. This means the Fed could possibly be done with its monthly security purchases as soon as March. The central bank could then begin to hike rates right away as it has already penciled in multiple hikes for 2022.

 

As is so often the case, however, the Fed could be wrong. The Fed has judged economic strength to be enough to carry the economy through a series of rate hikes. While the Fed could be correct in its assessment, it also stands to reason that equity markets and risk assets could see prices crumble once the tightening process begins. Stocks have risen over several years now and many analysts believe the primary reason for the seemingly never ending upside in equities is the easy Fed monetary policy. Markets and investors do like free or cheap money, after all, and the Fed has gone out of its way to provide a whole lot of it in recent years. Once the Fed turns the spigot off, however, is when things could get interesting. That day seems to be quickly approaching at this point and it is unclear if anything may change the bank’s thinking at this stage of the game.

 

In what may be a sign of underlying strength, gold is holding onto some gains today even as the economy posted third quarter activity that was stronger than expected. The economy grew by 2.3% for Q3, higher than the consensus estimates for a 2.1% rise. The more robust data set could potentially fuel downside in gold, as it could pave the way for the Fed to begin a more aggressive policy stance. The bulls did not seem overly interested today, however, and that could be due to several reasons, one of which is the day’s low trading volumes and lack of activity. This lack of activity is likely to continue through the first of the year and it may be difficult to trust any market action until larger players and volumes return.

 

The next several weeks should be more exciting. As investors return to the marketplace, prices could see heightened volatility and more sustainable moves in either direction. The gold market could see a rapid rise back above the $1800 level, and with some key resistance cleared out, could go on a rapid run higher that could even take it back towards previous all-time highs or beyond. Of course, the market could also become increasingly vulnerable to more selling. A run below the $1750 area could set the market up for a dramatic decline that could see mid $1600s or lower before it ends.

 

We continue to believe, however,. That the long-term outlook for gold is bullish and that prices will be higher, much higher, in the years ahead. The yellow metal could show how much patience pays as it is likely only a matter of time before new all-time highs are achieved.

The markets and investors are still digesting Wednesday’s FOMC meeting announcement. The Fed now has plans to taper quicker, and its monthly security purchases could be at an end by March of 2022. The Fed also alluded to multiple interest rate hikes, suggesting that it is looking at three quarter point hikes for next year. Given recent employment data, the Fed must feel it has good reason to adjust its policy and take a more aggressive approach. The Fed may also simply realize how far behind the inflation curve it has already fallen and may feel the need to act and act now to try to quell the rapid rise in prices being seen.

 

Whatever the Fed;’s thinking is, the economy is still showing signs of strength. New weekly jobless claims last week were slightly higher, but kept the amount on trend for tightening labor market conditions. Recent manufacturing data rose to a three-year high in NOvember while home building hit an eight-month plateau. All key data points are looking at more improvement in the coming year, and that economic strength may give the Fed more reason to tighten.

 

The Fed must walk a tightrope, however, as it looks to tighten policy without strangling economic activity. Although three quarter point rate hikes may send the economy back into recession, the central bank likely lacks any additional room to raise rates further. Three rate hikes next year would still keep the Fed Funds rate under 1% which may be a very far cry from where rates need to be to contain rising inflation. The period of massive inflation seen in the 1980s took interest rates to 20%, a level which certainly would not be tolerated by investors or markets at this point. Some analysts have suggested that a Fed Funds rate of 1.5% would likely act as the breaking point, and anything higher than that would cripple the economy and even spur a recession.

 

Of course, time will tell if the economy remains on its current hot streak. With the ongoing Covid-19 pandemic and the new variant spreading rapidly, it is impossible to tell how the economy and markets may be affected in the months ahead. Certain areas of Europe are already closing their borders once again. A full scale closure in major European cities and U.S. cities would likely change the Fed’s thinking and could keep rates from rising too far too fast, or possibly at all. Not only could the viral pandemic keep pressure on markets and the Fed, but so too could inflation and dollar weakness.

 

Despite recent market hiccups and despite the Fed possibly raising rates from the zero level, the gold market is still likely to see a bright future. For the patient, long-term investor, gold’s recent trading range could be an excellent place of value to buy for the long run. The Fed has backed itself into a very tight corner, and regardless of what it does or does not do with policy, the outlook for gold is as bright as ever. That makes right now the ideal time to buy physical gold as current prices may not be seen again once the market sees liftoff.

Most gold investors will be happy to leave 2021 behind. The year, despite seeing some blips of upside, was marked primarily by gold lacking any significant follow through. This kept the metal mostly under wraps despite a red hot commodity market. The main reason for a lack of follow through could likely be attributed to worries over the Fed raising interest rates and putting a halt to its monthly security buying.

 

The Fed in recent weeks announced that it would begin to taper its monthly security purchases, or QE, designed to keep rates low. The Fed Chairman has since suggested that the central bank may need to taper faster than originally anticipated, and some analysts are now looking for the Fed to begin hiking interest rates sooner than previously thought.

 

Have the recent Fed actions and commentary caused the floor to fall out underneath the gold market? No. Have they driven some volatility in the market? Sure. Will the Fed continue to be a source of selling and heightened volatility within the gold market? That remains unclear. In fact, Fed actions could have the opposite effect of what many think.

 

Even if the Fed does follow up its security purchase tapering with some rate hikes, would that have a dramatic impact on real rates? Probably not. If the Fed, as some believe, tries to hike rates multiple times-say three or four hikes-could that mean the central bank is becoming too aggressive? Absolutely. The question investors ought to be asking themselves now is how high rates could reasonably go, not if the Fed will begin to tighten them.

 

The Fed has already stepped in dung, insisting that the period of inflation was transitory in nature. Chairman Jerome Powell recently alluded to the Fed’s missteps, and suggested that the term transitory be “retired.” The Fed now seems to realize and acknowledge the fight it is facing. Inflation is likely here to stay, and with the Fed already well behind the curve may be more difficult to fight than ever before. The central bank now finds itself backed into a big corner, and it may lose credibility whether it tightens policy or not. The Fed’s lack of action in recent months, even years, could be the key to higher gold in the years ahead.

 

If the central bank maintains the current status quo and maintains a very accommodating level for rates, inflation could run very far out of control. This could keep investors eyeing the gold market and could keep the yellow metal moving higher over time. If the Fed decides to aggressively raise rates, it is likely to upset equity investors and fuel significant selling and volatility

across risk assets. This may also prove to be bullish for gold over the long run .

 

For the time being, gold is likely to maintain its recent trading range until a stimulus comes along that causes significant change. That stimulus may come in the form of aggressive Fed action or a lack thereof.

The gold market is seeing some sharp declines again today as the bears garner additional momentum. Today’s declines have now negated the previous uptrend and have put the bulls and bears on equal ground. That could make for some very interesting price action in the days ahead as volatility could see an upswing from here as the two sides battle for control of the metal.

 

The one-month low seen in gold today may attract further selling pressure into the market in the days ahead. That selling pressure could be counteracted, however, by concerns over the employment report due for release Friday. The heavily watched non-farm payrolls data is set to show an increase of 573,000 jobs, a modest rise from October’s addition of 531,000 jobs. The jobs figure is arguably the most important piece of economic data released on a regular basis. A stronger than expected showing of jobs data could give the Federal Reserve more reason to taper and taper faster than originally anticipated. A weaker than expected figure, however, could set the stage for some rethinking by the Fed and possibly even an adjustment of its tapering timeline. At this point, the gold market would likely benefit from weaker data as it could keep the Fed on hold longer, lessening the opportunity cost of holding gold in the process.

 

The first U.S. case of the Omicron Covid variant was discovered yesterday in California. That news, while not unsuspected, still rattled stock markets yesterday. It has been suggested that the variant is no more severe than other strains. However, and may even be less severe. Vaccination may also prove effective against the newest strain. Despite these assurances, however, markets may remain quite vulnerable to Covid volatility in the weeks and months ahead. Higher levels of volatility could potentially fuel a sell-off in equities and much of that capital could find its way into the gold market.

 

Although gold has some issues working against it, the yellow metal does still have the threat of increasing inflation on its side. Earlier this week, Fed Chairman Jerome Powell suggested that the central bank may have to taper its monthly bond purchases quicker. This commentary was far more hawkish than previous talk, although it is important to be clear that despite some hawkish rhetoric, the Fed is still maintaining dovish policies. Powell’s comments may suggest that the Fed is already far behind the inflation curve and now acknowledges that. The central bank could, therefore, be forced into playing catch-up later in the year.

 

Powell’s previous suggestion that inflation was likely to be “transitory” in nature has been proven flat wrong. Prices are now at multi-decade highs and are not showing any signs of letting up any time soon. Price pressures could keep investors looking for ways to protect their assets and purchasing power, and gold is likely the best bet for them to do exactly that.