The gold market is building on some gains seen Thursday into Friday’s session. Spot prices are up over $11 per ounce in mid-morning trade and are now sitting around the $1730 area.

Although the price rebound in gold may simply be corrective in nature, it does give the bulls some breathing room from a test of the $1700 level by the bears. After dipping below $1700 earlier in the week, albeit briefly, the bulls have shown themselves and come out swinging. The bargain hunting took gold for a rapid rebound, recapturing the $1700 level in the process and now putting some distance between it and current prices. The question investors may now be pondering is whether the recent rally in gold can last.

Downbeat Data

Some downbeat economic data could also stir the pot in the weeks ahead, as it did this past week. Higher-than-expected weekly jobless claims, for example, took gold for a ride higher. The weekly jobless claims have been trending higher for weeks now, and the data has now increased seven weeks in a row.

                                                                                                                                                                                   Source: Bloomberg.com

Other pieces of economic data could also have a bullish effect on gold. Weekly jobless claims may be a strong indicator of troubles ahead. As an increasing number of people are out of work, consumer spending could take a dip as well. Spending may already be on the way lower as investors feel the painful bite of inflation.

Inflation Roaring Hot

Inflation remains a powerful force that needs to be reckoned with. Price pressures remain at four-decade highs. Recent CPI and PPI data showed no slowing of inflation at this time and may encourage the Federal Reserve to continue to hike interest rates aggressively.

The European Central Bank tightened interest rates in the region by .5% this week, and the U.S. Federal Reserve is likely to follow suit with its own hike of 75-basis points or more next week. Some have suggested the Fed may now see fit to raise rates by 100-basis points. The Fed is likely to stick with its original plan for a 75-point hike, however, and avoid rocking the boat any more than necessary.

The notion of an even more aggressive Fed could become a major market focal point in the weeks ahead. Despite slowing commodity prices, there have been little to no other signs that inflation has already peaked. Should key pieces of economic data remain hot, such as CPI, PPI, and more, the Fed may see no other choice but to raise rates even higher and even faster than previously planned.

Could The Fed Induce A Recession?

An aggressive Fed is likely to keep the worries over a recession going if the economy is not already in recession. The more the Fed raises interest rates, the more those concerns may intensify. This could keep gold from declining much further as a massive exit from equities is possible. That capital would be on the lookout for a new place to work, and what better asset class to turn to under the circumstances than physical gold.

Key outside markets have been directionless for the most part this week. Crude is lower on Friday and trading around $95.50 per barrel. The Dollar Index is slightly higher on the day while yields are fetching just over 2.82% for the 10-Year Note.

There have also not been any new developments in the war in Ukraine. The battle has continued with no end in sight, primarily over separatist-controlled regions in the far east of the country. Unless there is some type of positive development in Ukraine, the war may continue to keep price pressures elevated and investor appetite for risk lower.

Just how far the Fed may be willing to take rates could become an increasingly popular conversation topic in the months ahead. Having already raised rates by 100-basis points since February, some have suggested the Fed may only have one or two more hikes in its pocket before the economy really shatters.

At that time, the Fed may be forced to reverse course and begin lowering rates again to bolster economic activity. Such a scenario could send gold skyrocketing to $2,400 or higher in short order.

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