The gold market is off to a slow start as traders and investors return Tuesday from the Memorial Day weekend. 

Rising bond yields and a stronger dollar today are both having an impact on gold. The yellow metal has now sunk below support at the $1,850 level and could potentially see further downside in the days ahead. 

Although weaker gold may alarm many of the short-term players, for the long-term investor any price weakness may present an excellent opportunity to buy gold at fire-sale prices. As long as the metal holds the $1,800 price level, any further dips may be viewed as a great opportunity to buy at a long position.

As summer trading officially gets underway today, many investors are wondering what key issues may affect the market as volumes begin to dry up substantially. We feel there are several factors that may drive gold prices all summer long, and those factors can be combined into three major components:

Inflation

High inflation has dominated financial news headlines and media for some time now. With price pressures now at 40-year highs, something must be done to get inflation under control before more damage is done. The Federal Reserve has already raised rates a couple of times, including a 50 basis point hike following the last FOMC meeting in May. 

While the Fed likely has at least two more 50-points hikes in store over the next two consecutive meetings, many still wonder if the Fed will finish the job and do whatever is necessary to get prices under control. Raising rates may seem fairly easy for now, but will almost certainly become far more challenging once the public and politicians that represent them are crying foul. 

If the Fed were to put its foot back on the gas pedal or somehow reverse course, it could lead the U.S. into an extended period of stagflation in which prices remain high as employment and economic output declines. Not a good situation.

Federal Reserve and Central Bank Activities

As mentioned previously, the Fed has begun the process of trying to combat generationally high inflation rates by hiking the federal funds rate. Previous rate hikes do not appear to be having much, if any, effects on inflation at this point. Pressures remain at multi-decade highs and without swift and significant action from the Fed, could get even more out of control in the months ahead. 

Fed Chairman Jerome Powell has now acknowledged the problems posed by price pressures. He has also stated that he would do whatever is necessary, using all of the tools at his disposal, to fulfill his mandate and get inflation to tolerable levels. However, whether the Fed actually follows through remains an open question. 

War in Ukraine and Geopolitics

The Russian invasion of Ukraine sent shockwaves around the globe. Given that Russia appears to be failing in its objectives, one has to wonder what the next shoe to drop could be. There are many questions that remain unanswered and hopefully many of them will remain that way. 

In the meantime, the war in Ukraine is not helping global inflation but rather is stoking it. Such a scenario could boost gold as it may send investors out of risky assets entirely and into perceived safe havens such as precious metals.

While Markets Falter, Gold Holds Strong

Consider gold’s recent 30-day performance, for example, in relation to other popular alternative asset classes:

  • Gold: (-2.54%)
  • Bitcoin: (-19.96%) 
  • Ethereum: (-34.50%)

Now let’s take it a step further and take a look at some popular tech stocks for comparison? 

  • NFLX: 4.72% 
  • MSFT: (-3.21%)
  • TSLA: (-10.93%) 
  • PYPL: (-2.40%)

Clearly, gold has fared better than some of the most widely held assets among retail investors, including Microsoft, Tesla, and PayPal. To escape volatility and losses in the equities market, it’s no surprise why so many investors are looking to gold and silver as a relative safe haven.

The Bottom Line: Global Uncertainty Presents Unique Opportunities for Gold

Whatever the case may be over the next several months, markets will have plenty to chew on. The threats of both inflation and recession are likely to become global focal points as central banks attempt to combat inflation through interest rate hikes. As rates rise, there may come a point at which the string becomes more than the markets can bear. 

That string could break, sending stocks and risk assets sharply lower in the process. Lower stock prices may hold the key to higher gold, in fact, and could send the yellow metal back to all-time highs or well beyond. 

That is why right now may be the ideal time to load up on gold. Consider opening a gold IRA today to capitalize on the next price movements in the gold market. 

 

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