In what some might consider a tough week for the gold market, the bulls did show some signs of resilience. Given the week’s large declines for the yellow metal, a period of capitulation may be quickly approaching. The drop seen Thursday of over $40 was due largely in part to the latest Producer Price Index reading and the Consumer Price Index reading the day prior. Both gauges showed smoking hot inflation, with prices at their highest level in over four decades.
Hot Inflation Data
The Consumer Price Index, or CPI, released on Wednesday showed a rise in consumer prices of 9.1% year-over-year. The strong CPI figures demonstrate the power that current inflation has and may ramp up expectations for an increasingly aggressive Fed to become even more so. As if the hot CPI data was not enough, Thursday’s red-hot Producer Price Index, or PPI, figures also showed price pressures at four-decade highs. Like the CPI data, the PPI did not do anything for policy doves and may even increase the chances of a larger than expected Fed rate hike at the end of the month.
The Fed’s Intentions
Following last month’s surprise 75-basis point rate hike, the Fed has tried to make clear it intends to fight inflation regardless of the economic consequences. The Fed has stated it believes that inflation becoming entrenched is the worse of two evils, and it seems willing to sacrifice economic growth to get prices under control. After last month’s 75-point hike, market expectations for a similar hike this month were, and remain, very strong. In the aftermath of Thursday’s PPI data, however, there has been increasing discussion of an ever larger, full point rate hike this month. If the Fed elects to hike rates by 100 bps, it would certainly send a message to markets that it does mean business. Whether it would have any dramatic impact on inflation, however, remains highly questionable.
After the above-consensus CPI and PPI data, as well as a surprise 100bps hike by the Canadian Central Bank, markets are now expecting a decent chance of a 100bps Fed hike on July 27th. The notion of a larger rate hike may keep investors on their toes, as it may also fuel even more recession concerns.
Despite worries over a recession and slowing economy, the markets could see some violent turns in the months ahead. Bear markets are known for having large rally periods, in which stocks or other assets may head sharply higher, for weeks or even months at a time. These rallies often end poorly, however, as once certain levels are reached, waiting sellers pounce and try to drive the market lower.
For the gold market, the $1700 area may be a key for the metal’s longer-term ambitions. The bulls have been able to hold this level, so far, but further tests of the area could prove positive. If the bears can take out the $1700 level to the downside, a fresh wave of selling could enter the market and take the price of gold sharply lower. By the time all is said and done, gold could reach $1600 or lower before finding willing buyers to stabilize prices.
Commodities Giving Signals
Commodity markets have sent investors some fairly clear signals in recent weeks. First, that inflation may have already peaked. Second, a recession is likely here or not far away. Sharp losses in these markets, including crude oil, cotton, copper, and more, may point to slowing demand and easing price pressures. Should these markets see further downside in the weeks ahead, it could potentially ease some of the inflation concerns within the marketplace and restore some more normal price action.
Cryptocurrency Bitcoin is surging as the trading week comes to a close. The currency is up by nearly 5% in the last 24 hours and could be poised for further gains in the week ahead. A close above the $20,000 level may encourage more buyers next week. The currency is seeing some benefit from dwindling worries over the possibility of a 100bps rate hike by the Fed this month. Should those worries decline further, Bitcoin could stand to gain more.