Gold is seeing a modest bounce back on Friday following some recent heavy declines. Spot gold is up by over $10 per ounce in mid-morning trade as some recent data could be pointing to a decline in inflation. The University of Michigan consumer sentiment survey showed a slight increase from the August reading. Inflation expectations within the report fell to a one-year low.

Perhaps as nothing more than a sign of relief, the gold market moved quickly from negative territory into neutral territory and has since gathered steam. The market is, as of this writing, holding support at the $1,675 area.

Recent Declines Seen

The gold market has seen some decent declines this past week. After spending several weeks stuck in the $1,700 to $1,800 level, the bears have finally fueled a breakdown that has taken the market well below the $1,700 level. The bears clearly have the advantage on their side currently.

Despite breaking prices down below $1,700, the bears now have another key area to contend with. Long-term support around the $1,675 level may prove to be a major barrier to lower gold prices. A break below this area, on a closing basis, would not only signal there may be more downside to come but would also put an end to the metal’s multi-year uptrend.

A Key Technical Test

The first test of this key technical level is already in the books, with the bulls having won the battle. That could change and change quickly, however, if the bears get things going to the downside. The market could essentially collapse quickly if broken, with little to stop the slide until the metal reaches the $1,550 area.

Source: Dailyfx.com

The FOMC meeting taking place next week may provide further clues about the Fed’s thinking and intentions. Markets are currently expecting a hike of another 75 basis points, possibly even 100 basis points next week. If inflation expectations continue to dwindle lower, the Fed may begin to rethink its plans moving forward.

Fed’s Plans For Next Year

The Fed’s plans for next year, for example, may be a topic of great debate. The central bank has said, multiple times, that it believes inflation to be the greatest risk to the economy. How far the Fed may be willing to go to get price pressures under control is another matter entirely.

The Fed’s hikes since the year began have already had an impact on the economy. If the Fed does hike several more times, those effects may be greatly amplified. The Fed obviously wants to avoid a recession, if possible, but may not be able to do so while raising rates aggressively.

Threat Of Recession

The threat of recession may keep markets alert in the coming months and could keep stocks and risk assets at bay. A recession would not only affect risk assets, either but could also choke off demand for gold and other perceived safe haven asset classes. Recent troubling Chinese economic data may also drive down demand for gold and metals and could put the global economy into recession.

The gold market may take its cues from the health of the global economy as the Fed continues to hike interest rates. There may come a point, despite whatever the Fed says, that the central bank sees fit to pause or even reverse course. That may not occur until sometime early next year, but if it does, gold could potentially rocket higher in rapid fashion.

For the time being, the yellow metal may react bearishly to additional rate hikes and hawkish Fed rhetoric. While prices could slide further into the end of the year, long-term investors should not be deterred. Gold at current levels is already akin to being on sale. Any further declines in the market may only exaggerate the sale price for a period of time.

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