The gold market is looking to pick up where it left off last week, although it is far from doing so in early Monday action. Gold is down sharply this morning as some weak economic data from China has spooked investors. The Central Bank of China has announced it will lower interest rates and boost liquidity for the nation’s financial system after some key pieces of data missed the mark.
Weak Chinese Data
The latest data for real estate, consumer spending, factory output, and investment were all considered to be weak. While this may not normally fuel such a reaction in the gold market, the weaker data is especially stinging right now as the U.S. and other nations try to take rates higher.
The lousy data from China (the world’s second-largest economy) may add to already robust fears of a global recession. Those recession concerns could weigh on global equity markets and other risk assets, possibly boosting gold in the process. The gold market is unhappy with the poor data today, however, as spot prices have declined by some $25 per ounce.
Outside markets on Monday do not appear to be having much of an influence on gold. Crude oil is solidly lower while the dollar is solidly higher. Yields are fetching around 2.83%. Yields may have a lessening effect on gold as long as they remain below the 3% level.
The bulls are still within striking distance of the $1800 level. Despite this failure, so far, to breach the $1800 area, the bulls are within a day of taking the market back to it or even beyond. The bulls are looking to produce a close above the $1800 level. If able to do so, the market could see a fresh wave of buying enter as longs look to reestablish positions.
The markets may not do a ton over the next few weeks as the summer doldrums come to a close in early September. Volumes have been very light and may remain that way for a few more weeks as traders go on last-minute vacations before the end of summer.
The End of Summer Doldrums
Along with returning trading volumes will come more input from the Fed. The FOMC is due to meet again next month, and its meeting could have enormous implications for markets. Fed Chairman Jerome Powell seemingly tried to lay the groundwork for the Fed to pivot away from its inflation fight after the FOMC meeting last month.
Whether the Fed does pivot away is still unknown. Many analysts believe the fed will have no choice but to give up its inflation fight. The Fed is extremely unlikely to take rates to levels that may actually have an effect on inflation, and without doing so it may be forced to allow inflation to run its course.
Could The Fed Cave Into Pressure?
The Fed could also face the decision of fighting inflation or keeping investors appeased. As rates go up and stocks go down, investors become increasingly agitated. Pressure on the Fed mounts through public commentary as well as from politicians. That pressure could become too much for the Fed if it takes rates much higher.
Inflation will remain the topic of much market discussion. Despite some weakening CPI and PPI data, inflation is unlikely to show substantial moderation for some time to come. If it has become entrenched, inflationary pressures could be here to stay.
The current recessionary environment may keep price pressures from rising much further, if at all. There are some reasons these prices could moderate in the weeks and months ahead, although any moderation may be only slight. Having backed itself into a major corner, the Fed may have already blown the inflation fight and higher prices could be here to stay.
What that could mean for gold is that the metal could remain elevated in price as investors look to hedge against inflation and dollar weakness. The reaction in gold today may simply be knee-jerk in nature. The dip being seen today may present an excellent buying opportunity for longs to enter.