The gold market is under some modest pressure again Monday as the new trading week gets underway. Lower crude oil prices as well as a stronger dollar index are likely the primary catalysts for price weakness today. In what may be a positive sign for the bulls, the market has cut its losses on the day by more than half as of this writing.

Stock Markets Weak

Equity markets are also kicking off the new trading week on the wrong foot. The benchmark S&P 500 index is down almost 40 points in early action as fresh worries about Covid-19 take a toll. Shanghai recently reported a new variant of the virus and markets may become increasingly concerned over vast shut-downs again taking place. The Macau region already shut down its casinos and other businesses for a period of one week, and should the need for shutdowns spread over the region, investors could become fixated on the possible economic damage caused.

As China puts fresh restrictions in place, worries over global growth may intensify. Weaker equity markets may keep gold from declining much further as investors will need to seek out alternative places to put cash to work.

Gold Bulls Shrinking

The recent turmoil in the gold market has affected market dynamics. It was reported today that speculative traders on Comex gold contracts cut their positions which now stand at three-year lows. Gold-backed ETFs also saw a decline in holdings as the months of May and June both showed net outflows. Although faith in gold may not be lost, investors could be looking only at the short-term rather than the long-term. The net outflows demonstrate there is little bullish belief in gold currently, and investors may feel better putting capital to work elsewhere or simply holding cash. With stock markets under pressure, however, the shrinking of the gold bulls may not last long and could reverse quickly.


Inflation Worries

Inflation remains a hot topic and a subject of significant debate. This Wednesday, markets will get more inflation data with the release of the Consumer Price Index, or CPI. For June, the report is estimated to show an annual rise of 8.5% year-over-year, following an 8.6% rise for May. Should the report come out in line with market expectations, it could be a non-mover. Should inflation be even hotter than expected, however, look out. Stocks and risk assets could potentially decline heavily and volatility could soar. A miss on the downside, however, could fuel a major market rally and decrease volatility in the weeks ahead. The CPI is likely the major focal point of the trading week, and markets may remain somewhat subdued until its release.

Gold Versus Commodities

A big question for investors in the second half may be how gold might perform versus broader commodity markets. Several commodities seemingly have reason to reverse course, whether due to a change in fundamentals or simply an overbought status. Crude oil, for example, could be a prime candidate for a Q2 reversal. Although weaker oil is generally considered to be bearish for gold, reversals in it and other commodity markets could arrive at the same time as a major reversal for gold. Gold has hovered near its 100-weak mean for about a year now, while other commodities have risen far beyond their historical norms. The year 2000 saw a similar setup, as the internet bubble finally burst and the yellow metal jumped into an extended bull market.

As global growth declines in the year ahead, gold could shine against base metals and other markets. If inflation is to ease in the rest of 2022, it could also make it easier for these markets to see significant declines.

Markets will pay close attention to the CPI data this week and will also look forward to the next FOMC meeting. The next meeting is likely to produce another 75-basis point rate hike from the Fed. Markets expect a hike of this magnitude, however, and may be more interested in the Fed’s outlook and plans for the months ahead. This could keep gold in neutral territory for several days as investors await further clues about policy in the year ahead.

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