The gold market is seeing a bit of a bounce in early Monday action as the Powell sell-off in stocks continues. The gold bulls have their hands full, however, as bearish charts, a stronger dollar, rising bond yields, and a hawkish Fed all take a toll on sentiment.
Powell Strikes a Hawkish Tone
Stocks are lower today as investor risk appetite remains dented following Jerome Powell’s speech on Friday. The end of the Fed Symposium in Jackson Hole, Wyoming came with some fireworks as Powell outlined the thinking and plans of a highly hawkish Fed. His speech was deemed to be more hawkish than expected and has sent fear into the hearts of investors.
The next FOMC meeting is still weeks away. There is significant time, therefore, for the Fed to examine the data stream and rethink its position. Given Powell’s speech and previous statements, however, it seems extremely unlikely that the Fed will take a pause or reverse course.
If the Fed stays on its current path, troubles could be ahead for the economy and markets. Worries about a recession have already increased dramatically in recent months. If the Fed looks to slow the economy even further, those concerns are likely to mount substantially.
The Economy is Slowing
The Fed recently acknowledge the economy is slowing. The labor market remains quite strong, however, and the economy has not yet slowed enough to put a major dent into inflation which remains near 40-year highs. The Fed may need to continue hiking rates and hiking them aggressively to achieve the desired effect.
If the Fed keeps tightening policy, the dollar and bond yields could also continue to rise. This could have a bearish impact on the gold market and could keep the bulls at bay for the time being. The bulls have thus far absorbed the selling pressure well, but additional pressure may become too much for the market to bear.
Despite Powell’s speech last week, some may still feel the Fed will reverse course sooner rather than later. This is a possibility, although it now seems nearly certain that the Fed will keep hiking through the end of the year. Should the central bank eventually decide to start easing again, it could be a major catalyst for higher gold and a weaker dollar.
Other Factors That May Affect Gold
In addition to the Federal Reserve and its plans, the gold market may also have to monitor other situations as well. The threat of a Chinese invasion of Taiwan, for example, could linger over markets for months to come. The Russian invasion of Ukraine and the Pelosi visit to Taiwan may make such a scenario more likely.
Should China decide to invade Taiwan, the U.S. and western forces would likely get involved. This could, in effect, turn into WWIII and may cause a massive uprising in financial markets all over the globe.
The yield curve remains inverted. Some key pieces of economic data are showing weakness or signs of cracking. Some have even suggested the U.S. is already in recession. Whether the country is in recession now or there is one to come, some tough times may be ahead.
As U.S. markets deal with a recession, or the threat of one, volatility may again rise in the months ahead. As volatility climbs, an increasing number of investors may see fit to buy gold for its perceived safety. On the other hand, however, is the fact that investors could be forced to sell their gold to meet margin calls if markets fall enough.
Volatility in gold has largely dried up in recent months. The market could be getting ready for a significant move, however, and that move may be larger the longer the metal remains sideways.