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.

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.

What Might The Fed Do?

Monthly Market Preview: Will September See Gold Move After The Fed Meets?

The gold market has been relatively quiet in recent months. Moving primarily sideways, gold prices have oscillated between $1,700 and $1,800 for weeks now. That trend may change this month, however, as the next FOMC meeting is set to take place later in the month.

What Might The Fed Do?

The Fed and questions about what it may or may not do have been a central catalyst for market price action in recent months. For a time, many seemed to believe the Fed could start to pivot away from its battle against inflation. While this did not necessarily mean the Fed would begin to loosen policy again, it did mean that the Fed may hike rates far less aggressively or even take a pause from rate hikes altogether.

Recent commentary from Fed Chief Jerome Powell seems to suggest otherwise. Powell recently gave a speech at the conclusion of the Fed Symposium in Jackson Hole, Wyoming. He suggested the Fed would stay in the fight against inflation and that it viewed inflation as the greatest risk to the economy.

If the Fed is determined to bet inflation to its desired level of 2% annually, how will it get there? Recent aggressive hikes from the Fed have slowed the economy but thus far have not shown to be very effective against price pressures. The Fed is extremely unlikely to take rates where they may need to go to slow inflation (20% or so?) so how does it plan on accomplishing its goal?

Key Questions That Need Answering

That is the question that will need an answer in the months ahead. Some data have recently shown that inflation could potentially have already peaked. If that trend continues, the Fed may find itself in good shape. If, on the other hand, the data stream shows inflation remaining near a 40-year high, the Fed could be in trouble.

Markets are currently betting on a large rate hike this month. The odds are pretty evenly split between a 50-point hike and a 75-point hike. If the Fed hikes less than 50-points, it could send a dovish message to the markets. if the Fed hikes more than 75-points, it could send a hawkish tone through markets.

How Will The Fed Proceed?

Once this month’s FOMC meeting is over and done with, the Fed will have to figure out how it wants to proceed going forward. There is currently little to no reason for the Fed to stop hiking or reverse course and begin easing. Markets have tolerated higher rates so far, although the market’s tolerance of higher rates could start to wear thin in the coming months.

 

Source: Bloomberg.com

That is what could be the true test for the Fed and its inflation battle. How might the Fed handle markets moving significantly lower? If markets were to really crater, surely there would be increasing pressure on the central bank to halt its rate hikes or even start undoing them. If the Fed elects to stand fast at that point, it will preserve what little credibility it may have left.

If the Fed elects to give into that pressure, however, it may not only ruin its reputation but may also put the economy into an extended period of stagflation. The Fed has backed itself into a corner and now will have to follow through to avoid problems that are even worse.

Volatility May Remain

Whatever the Fed does or does not do, markets may remain jittery for some time. The word “recession” has already been tossed around quite a bit, and if the Fed keeps tightening that term will likely become increasingly popular. The U.S. could even be in a recession already. Whether it is or not, tough times may be ahead for the U.S. and global economies.

That makes right now the ideal time to explore your options for gold ownership.

Has Powell Backed The Fed Into A Corner?

Weekly Market Review: Powell Seen As More Hawkish Than Expected

The most important moments for gold this week have now come and gone. In a speech earlier today, Fed Chairman Jerome Powell struck a surprisingly hawkish tone. He said the central bank will stay with its restrictive policy stance for some time while reiterating the central bank’s goal of bringing inflation back down to the 2% target.

Has Powell Backed The Fed Into A Corner?

Not only did Powell suggest the Fed would keep policy tight for some time, he also warned against the risks of loosening policy prematurely. Powell acknowledged that rising interest rates are slowing growth. He added, however, that those risks are outweighed by inflation.

If the Fed was in a corner before, it is now really in a corner. Seemingly suggesting the Fed will continue to hike rates aggressively, the Fed may now be forced to do exactly that, regardless of the economic consequences. Should the Fed at some point elect to reverse course now, it could lose any remaining credibility it has within the market.

Powell acknowledged the pain that rising rates can cause to households and businesses. He suggested that inflation would be a worse pain, however, and that without price stability the economy does not work for anyone.

 

                                     source: Bloomberg.com

Powell also acknowledged the slowing effect of previous rate hikes but said he also sees pockets of strength. In other words, more work needs to be done and the Fed is willing to do it.

Powell’s commentary did provide markets with some insights into the Fed’s thinking. They did not, however, provide what the markets were looking for. The lack of forward guidance by Powell may keep investors guessing in the months ahead. The CME FedWatch Tool still shows odds near evenly split for a 50 or 75-basis point hike next month.

What Might The Fed Do After September?

What the Fed does beyond next month may be the bigger question. The Fed could take a slower approach and allow more time to see how its previous hikes affect the economy. It could also take a complete pause and wait to hike further altogether. After Powell’s speech today, however, it seems increasingly unlikely the Fed will consider taking rates down again anytime soon.

Many analysts felt that Powell’s speech did not reveal anything new. No signal was provided for the meeting next month and the Fed will not make a major U-turn next year. Both of these things have already been widely discussed by other Fed officials and there is a lack of anything fresh that investors may use to position themselves for the Fed.

Powell May Have Invited Second-Guessing

As investors are kept second-guessing the Fed and what it may do in the months ahead, markets could see another round of volatility. Stocks have recovered much of the lost ground in recent months, but that is nothing new in a bear market. Stocks will often come roaring back, in fact, and seemingly recover several times before rolling back over and going lower than before.

If markets do encounter increasing volatility, gold and other perceived safe-haven assets could stand to benefit. Although gold has not moved higher in recent months, it has also done a good job of absorbing any selling pressure. Both the bulls and the bears have been unable to sustain movement higher or lower. That trend may be set to conclude and conclude sooner rather than later.

For the time being, gold remains stuck in a range and moving mostly sideways. The key technical levels of $1,700 and $1,800 remain in focus. The bulls have been unable to produce a close above $1,800 and the bears have been unable to produce a close below $1,700.

Given the metal’s lack of volatility and movement in recent weeks, it seems to suggest that whichever side is broken above or below first could dictate price action for months to come. Visit us online today to explore your options and get started!