Although the gold market finished Monday’s session lower by over $5 per ounce, the metal was fairly quiet throughout the day today. Now at $1787 and change as of this writing, the bulls have not let the bears take the market too far below the key $1800 level. The gold market may, in fact, remain sideways for the next two weeks as investors take off for the holidays and the new year is celebrated.

In some bullish news for gold today, the metal saw an increasing amount of bullish bets from hedge funds. The metal saw inflows last week of over $3.5 billion as it may be seeing some benefit from changing Fed policy expectations. While an easing of inflation could be considered bearish for gold, that same easing could also allow the Fed to take its foot off the gas pedal and stop raising rates aggressively as it has for months now. The Fed did just last week hike rates, but by only 50 points this time around rather than the 75 points that had become the norm in recent months. Any further signs of inflation letting up could be bullish for gold as they may keep the Fed sitting tight rather than hiking rates.

According to recent CFTC data, the gold market is now net long some 37,449 contracts. It also saw shrinkage in the total short position, which declined by 3,854 contracts. If the hedge funds and large market participants are getting bullish again, that could lead to good things for the yellow metal in the weeks and months ahead. The market is now the most bullish it has been since early October and that could lead to the bulls retaking and maintaining trade above the key $1800 level.

Of course, expectations can and do change. Much of how interest rates play out in the year ahead will be determined by the inflation data. If the data continues to show easing price pressures, the markets may be a lot closer to the first rate cut than previously thought. If the data shows a rebound in inflation, however, look out below. Stocks and gold could both decline significantly if fears of an aggressive Fed resurface. The Fed has already alluded to the fact that it feels rates need to stay higher for longer. This could make the first several months of 2023 interesting as the Fed could also keep raising rates albeit by fewer basis points per hike. The Fed raising rates may continue to make markets nervous, as it has in recent weeks, about the Fed leading the economy into a recession.

Whether a recession develops or not remains unclear at this point. One thing is very clear, however: The gold and stock markets both prefer lower rates to higher rates. Any signs that the Fed may complete the current tightening cycle sooner than anticipated or that it may not hike as far as previously expected could be bullish for both asset classes. Any signals to the contrast could be trouble for the bulls, however, and could lead to sharp declines in both gold and equity markets.

The gold market is being sold off heavily on Thursday. Spot gold is down some $30 per ounce and has now fallen back below the key $1800 level. The yellow metal made a solid upside run in recent days, but if the bulls are unable to hold the $1800 level, that run may have been for nothing. If the bears produce a close below that level today, there could be more selling pressure in the days ahead, possibly even leading the market back down to the recent breakout point of $1700. That would be a major victory for the bears while putting a very serious dent in the bulls’ hopes.

The Fed caught markets a bit off-guard this week with its commentary following the decision to raise rates by another 50 basis points. Although the central bank did not hike by 75 points as it has done in several meetings prior to this week, it did suggest that rates will need to be higher for longer. The higher for longer theme is what investors appear to have taken away from the meeting and that may weigh on both stocks and gold as the year comes to an end in just a couple of weeks. While markets could simmer down a bit as the holidays rapidly approach, how they will begin 2023 is another matter entirely. Heading into the FOMC meeting this week, it was widely expected that the Fed would not only take its foot off the gas pedal but that it would also signal a much slower pace of hikes into next year and possibly even a reversal in its rate hiking campaign.

The Fed did not deliver that message this week, however, and now has investors a bit spooked. Following the U.S. Fed yesterday, the European Central Bank earlier today also took a more hawkish stance than anticipated. The ECN raised interest rates by a half point, a smaller increase than previous hikes. The central bank did also suggest, however, that more rate hikes are necessary and that the central bank still has a lot of work to do to get inflation under control. The ECB joined the U.S. Federal Reserve and the Bank of England in its half point rate hike this week, slowing the pace of rate increases from the previous 75 point hikes done by all three central banks.

With these central banks all having their final policy meetings for 2022 this week, the markets will need to take a wait and see approach as the new year gets going. Recent inflation data has shown some weakness in price pressures compared to market expectations. Should that trend continue, the Fed and other central banks may not see fit to keep raising rates as much as anticipated. Of course, time and the data will tell. Hopes for the central banks easing on their rate hiking paths may lead to some heightened volatility in the year ahead. The notion of higher rates for longer may keep stocks and gold under some pressure until the Fed signals it will begin cutting rates again. Rates are likely to reach 5.1% in 2023, but are expected to decline to 3.1% by 2025.

In perhaps the most important economic report of the week outside of tomorrow’s Fed interest rate decision, inflation appears to be cooling further. The latest reading of the Consumer Price Index showed inflation rising at a rate of 7.1% year-over-year. That figure was lower than the 7.3% rise forecast by many analysts and appears to have provided markets with a very large sense of relief. The question now may become whether the Fed sees the need to keep raising rates early next year or if it will decide to take a pause and let previous hikes work their way through the economy. While the report still shows massive inflation, the slightly cooler rate of price pressures may give the Fed much to consider in the weeks ahead as 2022 comes to a close.

Gold surged to a five-month high following the report, while stocks also surged sharply higher. After being up over 800 points this morning, the Dow Jones Industrial Average has given back the majority of those gains throughout the session. In mid-afternoon trade, the Dow is now only higher by 56 points or so and could even go negative before the end of the session. Gold has given some of its gains back as well, although the yellow metal is still sharply higher on the session by nearly $30 per ounce.

With spot gold now valued around $1810 per ounce, the bulls will need to show they can hold the $1800 level in the days ahead. Today’s upside puts the market on very solid technical footing. That footing may become very fragile, however, if the bulls are unable to hold $1800. A move back below this key technical barrier could give the bears some ammunition and could fuel a further leg lower in price. On the other hand, any moves back towards $1800 may now be aggressively bought as the bulls look to defend this area on the chart.

The yellow metal may remain somewhat quiet and subdued ahead of tomorrow afternoon’s FOMC decision. The Fed is expected to raise interest rates again. The question this time around is by how much. While another 75 point rate hike is possible, it has become increasingly unlikely. The Fed will almost certainly raise rates tomorrow by 50 basis points and step away from the bigger, more aggressive hiking seen in recent months. The Fed is likely to keep raising rates, however, and may now leave rates at higher levels for a longer period of time. Despite this notion, the market bulls like the idea of slower and smaller rate hikes and may keep pushing prices in gold and stocks higher until proven wrong.

The U.S. Dollar is sharply lower today after hitting a 5.5-month low following the CPI data. The dollar has been a major roadblock to higher gold in recent months, and if it reverses course it could also fuel buying in gold that could see it quickly approach all-time highs or beyond.

The gold bulls are finishing off the week on the right foot. Spot gold prices are higher today by $8 per ounce, putting spot prices just under the $1800 level at $1797.50. With the market ending the trading week at a four-month high, the outlook for gold may be evenly split between the bulls and the bears. A key test for gold may be seen as soon as Monday. The bulls will almost certainly try to test the $1800 level now that the market is close. If the bulls are able to produce a close above this key level, the road may be open to further upside. If the bulls fail, however, the bears may regain control of the market rapidly and try to take prices back to the $1700 level.

This Wednesday, the Federal Reserve will announce its decision on interest rates. After some commentary about slowing the pace of rate hikes, it is widely expected that the Fed will raise rates by 50 rather than 75 points on Wednesday. Likely far more important than the rate hike itself, however, will be the updated Fed projections. While this week will determine monetary policy through the end of the year, markets may now be far more concerned with how the Fed may approach policy as 2023 gets underway. If the Fed does in fact take a slower approach to rate hikes, it may provide gold and stocks with a needed boost. If inflation remains robust, however, and the Fed does not slow the pace of hikes, it could lead to not only lower stocks and gold but also to an economic recession.

The $1800 level is the near-term key for the gold bulls. After acting as support previously, the $1800 level will now likely act as resistance. If the bulls can retake this level on a closing basis, it would likely encourage more bulls to step into the market to take advantage of upside momentum. This could lead to a fresh trading range for gold higher than the previous range and trending to the upside over time. A failure at this level by the bulls could be catastrophic. A failed attempt to take out resistance at $1800 could send a signal to the bulls that the market does not have the underlying strength to move higher, and could give them reason to exit the market rapidly. This could, in turn, lead to a robust and rapid decline in gold that could see the market give back $100 or more very quickly.

In  our view, the gold market may very well produce a close above $1800 in the week ahead. The market could see some increasing volatility as the Wednesday Fed day approaches, but should stay on a sideways to higher trend. Once the Fed day is over, the market could then spend the rest of the year trading sideways to higher in lackluster, uninspiring price action.

The Gold market has been discussed significantly in recent months. The metal has had a hard time avoiding declines as the Fed has stayed the course thus far and continued to raise interest rates aggressively. Now that the Fed has signaled it may slow the pace of further rate hikes, the metal has seen a shift in dynamics that have taken it higher. The metal now sits just below the key $1800 level, and is within a day’s push of retaking this technical level and setting itself up for more upside in the weeks ahead. Action in the gold market has been primarily a function of the Fed and its outlook for rates in the months ahead.

Although this has not been discussed much recently within financial media, there still exists a growing move away from the dollar. The U.S. currency remains the globe’s reserve currency of choice, but for how much longer is anyone’s guess. This week has seen some headlines that may be indicative of that move gaining steam. It was reported this week that the nation of Ghana is seeking to structure a gold for oil barter system to pay for its oil using gold rather than U.S. Dollars. It was then reported Wednesday that China has added some 32 tons of gold to its reserves, for the first reported addition to its holdings since 2019. This addition now puts China’s gold reserves at 1,980 tons.

Despite the fact that China’s announcement has seemingly come out of the blue, it is not at all surprising. Many analysts felt China was building its gold reserves throughout the year. The timing of this announcement may be far more important than the amount of gold purchased. The announcement of China’s addition to its holdings comes two days after increasing talk of gold for oil By Ghana. As de-globalization accelerates, many nations could look to amp up their commodity holdings and add more gold to their reserves. This would seem to suggest that the move away from the dollar is gaining more traction.

If global nations continue to move away from the dollar, the currency is likely to lose value over time. The dollar has been quite strong in recent months as it took its cues from the Fed, rising as the central bank raised interest rates. If the dollar were to reverse course at some point, however, the gold market could stand to gain substantially.

While a larger scale move away from the dollar will not happen overnight, the move is already underway. This week’s gold for oil talk is just the latest salvo in a battle that began years ago. Other nations have also begun looking for ways to transact outside of dollars. This has led to the establishment of credit lines and other vehicles for the transfer of funds between nations. This move away from the dollar could take years to come full circle, but when it does dollar holders better beware.

In the meantime, the gold market is likely to take its direction from the Fed and its plans regarding monetary policy. Jerome Powell recently suggested the Fed would slow the pace of its rate hikes. While that was cheered on by the dovish camp, Powell did also state that rates may need to remain higher for longer in order to get inflation under control. Powell may simply be trying to keep market expectations in line with likely scenarios, but he did seem to signal that a more dovish Fed may be seen in the months ahead.