The gold market did more of the same last week as markets await this week’s FOMC meeting. Gold prices were stuck between support and resistance again as neither the bulls nor the bears were able to muster enough strength to push prices up or down. Market participants were likely content waiting for this week’s FOMC meeting conclusion on Wednesday afternoon. 

It is widely expected that the Federal Reserve will again raise the Fed Funds Rate by 50-basis points this week. Markets not only expect a 50-point hike this week but also believe the central bank will hike another 50-points at its next meeting and possibly the meeting after that. 

How much the Fed may hike rates is the subject of some debate. ABN AMRO recently suggested the Fed would raise rates by 1% over the next three months. The Dutch bank also said it believes that the Fed could slow down its pace of hikes after June, raising rates by 25-basis points at a time until a target of 2.50%-2.75% is achieved early next year. 


For this scenario to play out, however, inflation will need to show some signs of cooling off in the months ahead. If price pressures do not ease at all, the Fed could elect to continue raising rates aggressively and more 50-point hikes may be seen. The Fed could even consider raising rates by 75-points, although such a hike appears to be unlikely at this point. 

Stronger Fed Action to Come?

Some believe that a 75-point move by the Fed is not only possible but increasingly likely. TD Securities recently suggested that such a move by the Fed is increasingly likely. The company recently stated “The next few Fed hikes are set in stone, which limits the relevance of imminent data releases to the left tail of Fed funds pricing, but the market has aggressively challenged the right tail-bringing 75bp hikes into scope. In turn, the trading bias is still to the downside.” 

Whatever the Fed decides or does not decide to do, volatility is likely to remain in place or increase further. Friday’s inflation data, which showed inflation higher by 8.6% year-over-year for May, has increased hawkish expectations. The threat of inflation may be far from over, and the Fed could be forced to raise rates even more aggressively than previously thought. The central bank’s credibility may now be on the line, however, and some are wondering if the Fed can bring inflation under control.

Questions surrounding the Fed and its credibility have gotten the attention of some big-name investors. David Einhorn, President of Greenlight Capital, is one of the latest major market players to sound off his opinion. Einhorn recently suggested that gold is essential right now, as the Fed is bluffing when it comes to taming inflation. 

Market-watchers Look On With Doubt

It is not only individual investors that are questioning, and perhaps doubting, the Fed. The World Gold Council recently released its annual central bank gold survey. 57 banks participated in the survey and 25% of those banks said they desire to increase their gold reserves during the next 12 months. Numerous issues may be the culprit for higher gold demand, among them the threat of stagflation and the ineffectiveness of the Fed. 

The World Bank issued a warning that a recession may be hard to avoid. The bank suggested that food shortages, the war in Ukraine, and stagflation risks may all be primary factors in its economic downgrade. It slashed its 2022 growth forecast from over 4% to just 2.9%. The Bank did not rule out a return to the 1970s as global growth confronts major issues such as the war in Ukraine, Chinese Covid lockdowns, and ongoing supply-chain disruptions. 

Despite the risks of the global economy heading into recession, the gold market has remained in neutral territory for weeks now. The $1800 and $1900 levels remain key support and resistance. A close above or below these levels could dictate the direction of gold for the months ahead. The gold market may simply be waiting for more clarity from the Fed and its plans regarding interest rates. The week ahead could provide gold investors with some key clues about the central bank’s intentions. This could, in turn, assist the bulls or the bears with sustainably moving the market. 

A rising dollar and higher treasury yields may keep gold’s upside somewhat limited in the weeks ahead. Any changes in action or rhetoric from the Fed could, however, lead gold into a breakout situation. The central bank will need to be very careful as it navigates policy, as the slightest misstep could put the economy into recession or lead to an extended period of stagflation. The threat of such a scenario may keep gold from declining much further and could even lead to a rally back above the $2000 level in the months ahead.

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