The gold market is weaker on Monday as the new trading week gets underway. The market appears to be picking up where it left off last week. The bulls are seemingly lacking any fresh, bullish catalysts to take prices higher. Investors are also a bit wary of this week’s FOMC meeting announcement. It is widely expected that the Federal Reserve will raise interest rates by another 75-basis points. Some analysts have even suggested that the Fed could hike by a full 100-basis points this week.

Fed Determined To Fight Inflation

The Fed is seemingly attempting to send the message that it will not be deterred in its efforts to get rampant inflation under control. Inflation now sits around a 40-year high, and without much help from the Fed could spiral even further out of control.

The Fed has said that it believes that inflation is the most dangerous risk to the economy right now. The central bank has stated that it is concerned about inflation becoming “entrenched.” Should inflation become the new normal, it may be far more difficult, if not impossible, for the Fed to control the economy through standard methods. The Fed’s willingness to slow the economy drastically right now has many worried about a Fed-induced recession.

                                                                                                                                                                                            Source: Bloomberg.com

Recession Worries

Recession worries have hit markets hard in recent weeks. If the Fed continues to tighten monetary policy through higher interest rates, it could reach the breaking point. Despite this risk, however, the Fed has taken the position that a recession is better than price pressures becoming permanent. Despite the Fed’s best efforts though, the inflation problem may not go away just on higher interest rates. It could take an interest rate of 20% or more to quell inflation, and it seems extremely unlikely that the Fed would take rates to Volcker-era levels.

If the Fed is unwilling to go as far as may be necessary to get inflation under control, an extended period of slow to no growth and problematic price pressures could be seen. “Stagflation” as it is commonly known could take hold and rob the economy of any growth for several months or even years.

Risk of Stagflation

Should the Fed at some point decide to halt raising rates or even reverse course, stagflation could become a reality. It is no secret that without the zero interest rate and expanded balance sheet policy of the Fed, stocks would be nowhere near current levels. As the Fed attempts to normalize rates and shrink its balance sheet, it stands to reason that the opposite effect may be seen. Stocks could fall and fall hard.

The Fed will certainly hike rates this week. That has already been baked into the cake. The bigger question now is if the Fed will begin to pivot away from inflation-fighting and turn towards digging the economy out of the hole it is already in. Any dovish language from the Fed this week could spell big trouble for the dollar and fuel a sharp rally in gold and metals that could see prices turn sharply higher in short order.

Such a move by the Fed could erode any remaining credibility the institution has left if any. A reversal from the Fed would send mixed messages that could significantly affect a variety of markets. Not only would markets see the immediate impact, but they could also suffer over the long-term from the stagflationary effects.

A Big Move Coming?

The gold market has traded mostly sideways for several weeks now. Volatility has contracted to negligible levels and neither the bulls nor the bears have been able to prove themselves. This could change in the days or weeks ahead, however, as volatility contraction could signal a large move on the horizon.

The bears will continue to target a close below the $1700 level. The bulls need to produce a close above $1800 and then $1900 in order to attract more buying interest. The bulls have done a good job of absorbing the selling thus far. It may become increasingly difficult for them to do so, however, if the bulls do not catch a break.

The FOMC meeting this week could be a major market catalyst. The direction of any significant moves has yet to be determined. The Fed could send gold sharply lower or it could skyrocket higher depending on its plans.

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