Fed Action Forthcoming

Weekly Market Preview: Bulls On The Ropes (Sept 19, 2022)

The gold market is a bit weaker on Monday despite some keener risk aversion in the marketplace. A stronger dollar along with rising treasury yields seem to be the primary bearish factors for gold today. As has been the case for some time now, investors appear to be choosing the dollar and U.S. Treasuries for their safe haven needs and leaving gold alone.

Under Long-Term Support

Early action Monday sees gold hovering just above the nearly 2.5-year low reached last week. The yellow metal is currently under long-term support at $1,675 in what may be a sign of additional weakness to come. The longer the metal spends underneath this key level , the more likely a move lower may become.

The bulls have their work cut out for them. There is little, if anything, in the way of the bears taking prices sharply lower from current levels. Some have suggested the slide may continue until the metal reaches the $1,550 area. While this remains to be seen, the bears do appear to have the clear advantage right now.

Fed Action Forthcoming

This week, markets will see the latest Fed action as the FOMC meeting concludes. Expectations are widely favoring another aggressive rate hike of 75 points. Some have even considered a full, 100 point rate hike this week as a possibility. The Fed action this week is seemingly already priced into the market. What investors likely want to know is what the Fed plans on doing down the road.

Should the Fed remain hawkish in its actions and rhetoric, gold could see ongoing pressure. The yellow metal may not, in fact, begin to make a sustainable turnaround until the Fed signals a change in policy. Such a signal is unlikely to come anytime real soon, however, and could be well into the next year before being seen.

If the Fed does not signal a change in policy at some point, stocks and risk assets are likely to come under increasing pressure. That pressure will eventually break the market in what could be a quick and massive decline. At that point, investors may have nowhere to turn to except gold if they do not want to be stuck holding dollars.

If the Fed does decide to take a break from its rate hikes or signals it may begin loosening rates again, the gold market could see a substantial rally. The yellow metal has been driven lower not only by the notion of higher interest rates, but also by the effects of that idea. Higher rates may boost not only the dollar but also U.S. Treasury yields as well, both of which are bearish factors for gold investors.

Source: Live Trade Room

A dovish move by the Fed could not only deflate rate expectations, but could also put a major dent into the dollar and yields. This could, in turn, give gold a serious boost and put it onto more neutral footing from which it may be able to stage a significant rally.

Building A Base?

As the yellow metal spends time around long-term support at $1,675, it also has the potential to build a significant base. If the bears are unable to take prices lower from here, bargain-hunting bulls may scoop the metal up and eventually cause an upside breakout. Gold’s three-year uptrend would also remain intact then.

The gold market has been primarily rangebound for months now and may continue to move sideways into next year. The Fed seemingly holds the keys to gold’s fortunes, and the metal may not make any sustainable moves until more is known about the central bank’s plans.

The bulls need to get and maintain the gold price above long-term support at $1,675. They then need to take the market back above $1,700 and a close above $1,800 could potentially attract fresh buyers. If the bears have their way, the market could sink to the $1,550 level before finding some solid footing.

Recent Declines Seen

Weekly Market Review: Bears Are In Control (September 16, 2022)

Gold is seeing a modest bounce back on Friday following some recent heavy declines. Spot gold is up by over $10 per ounce in mid-morning trade as some recent data could be pointing to a decline in inflation. The University of Michigan consumer sentiment survey showed a slight increase from the August reading. Inflation expectations within the report fell to a one-year low.

Perhaps as nothing more than a sign of relief, the gold market moved quickly from negative territory into neutral territory and has since gathered steam. The market is, as of this writing, holding support at the $1,675 area.

Recent Declines Seen

The gold market has seen some decent declines this past week. After spending several weeks stuck in the $1,700 to $1,800 level, the bears have finally fueled a breakdown that has taken the market well below the $1,700 level. The bears clearly have the advantage on their side currently.

Despite breaking prices down below $1,700, the bears now have another key area to contend with. Long-term support around the $1,675 level may prove to be a major barrier to lower gold prices. A break below this area, on a closing basis, would not only signal there may be more downside to come but would also put an end to the metal’s multi-year uptrend.

A Key Technical Test

The first test of this key technical level is already in the books, with the bulls having won the battle. That could change and change quickly, however, if the bears get things going to the downside. The market could essentially collapse quickly if broken, with little to stop the slide until the metal reaches the $1,550 area.

Source: Dailyfx.com

The FOMC meeting taking place next week may provide further clues about the Fed’s thinking and intentions. Markets are currently expecting a hike of another 75 basis points, possibly even 100 basis points next week. If inflation expectations continue to dwindle lower, the Fed may begin to rethink its plans moving forward.

Fed’s Plans For Next Year

The Fed’s plans for next year, for example, may be a topic of great debate. The central bank has said, multiple times, that it believes inflation to be the greatest risk to the economy. How far the Fed may be willing to go to get price pressures under control is another matter entirely.

The Fed’s hikes since the year began have already had an impact on the economy. If the Fed does hike several more times, those effects may be greatly amplified. The Fed obviously wants to avoid a recession, if possible, but may not be able to do so while raising rates aggressively.

Threat Of Recession

The threat of recession may keep markets alert in the coming months and could keep stocks and risk assets at bay. A recession would not only affect risk assets, either but could also choke off demand for gold and other perceived safe haven asset classes. Recent troubling Chinese economic data may also drive down demand for gold and metals and could put the global economy into recession.

The gold market may take its cues from the health of the global economy as the Fed continues to hike interest rates. There may come a point, despite whatever the Fed says, that the central bank sees fit to pause or even reverse course. That may not occur until sometime early next year, but if it does, gold could potentially rocket higher in rapid fashion.

For the time being, the yellow metal may react bearishly to additional rate hikes and hawkish Fed rhetoric. While prices could slide further into the end of the year, long-term investors should not be deterred. Gold at current levels is already akin to being on sale. Any further declines in the market may only exaggerate the sale price for a period of time.

An Uneventful Week

Weekly Market Review: Gold Set To Finish Strong

The gold market appears ready to put in a strong finish to the trading week. Spot gold is up over $9 per ounce as of this writing and is approaching the $1,720 area. The yellow metal is likely being driven by a sharp drop in the Dollar Index today. The dollar has come off its lows, however, and the gold market has come off its highs.

An Uneventful Week

This week was another uneventful week for the gold market. The bears did get some work done and nearly took prices for a test of the $1,700 level. As has been the case previously, the bulls decided to step in and buy as prices approached the $1,700 area and the market now has some distance between spot prices and $1,700. Whether the bulls can maintain this distance or build on it remains another question.

The back-and-forth price action in gold may continue until the Fed meets again later this month. The Fed has recently laid out its thoughts, for the most part, but changes could always be made based on the recent data stream. Both the U.S. and China have shown some weakness in recent data, and as the globe’s first and second-largest economies, that could spell trouble for the markets in the months ahead.

Fed Needs To Watch Its Step

The Fed may need to be increasingly careful as it looks to continue hiking rates aggressively. As recently as a couple of weeks ago, some market participants felt the Fed could begin to pivot away from its inflation fight. That does not appear to be the case, however, and Chief Powell has now made it abundantly clear that they intend to get inflation to desired levels before giving up.

The biggest question for markets right now may be whether the Fed actually has the tools necessary to calm inflation. During the last period of rampant inflation, Paul Volcker took interest rates to 20% to get price pressures under control. While such a move may or may not be necessary currently, one has to question if the Fed would be willing to take rates that high.

Is The Fed Unwilling To Do What It Takes?

If the Fed is truly unwilling to do what it takes to get inflation under control, then one has to wonder what the central bank could be doing early next year. The Fed seems to want to fight the notion that it will reverse course and start easing again. Markets are now pricing in string odds of either a 50 or 75-point hike this month. The Fed will also be meeting again before year’s end and could raise rates even more before 2022 comes to a close.

 

Source: Investopedia.com

What the Fed might do next year should be on everyone’s minds. It does seem clear, after all, that stocks and risk assets are unlikely to remain higher or even stable in the face of rising rates. Public and political pressure is likely to mount on the Fed as it takes rates higher and squeezes investors.

When Might The Fed Cave?

At what point might the Fed cave? Some analysts are of the opinion that the Fed will hike rates a couple more times before reversing course on policy. If nothing else, the Fed could hike a few more times and then decide to take a pause. Whatever the Fed decides to do, more economic pain will be on the way. If you are worried about economic pain, explore your options for gold ownership now.

That economic pain may keep a floor under gold prices in the months ahead. While gold can be sold to meet margin calls and for overall risk aversion, it is also oftentimes purchased during periods of time when investors just want to hang on. That is likely to be the scenario once the new year gets underway and gold could stand to benefit handsomely if the Fed does not deliver.