The gold market appears ready to put in a strong finish to the trading week. Spot gold is up over $9 per ounce as of this writing and is approaching the $1,720 area. The yellow metal is likely being driven by a sharp drop in the Dollar Index today. The dollar has come off its lows, however, and the gold market has come off its highs.

An Uneventful Week

This week was another uneventful week for the gold market. The bears did get some work done and nearly took prices for a test of the $1,700 level. As has been the case previously, the bulls decided to step in and buy as prices approached the $1,700 area and the market now has some distance between spot prices and $1,700. Whether the bulls can maintain this distance or build on it remains another question.

The back-and-forth price action in gold may continue until the Fed meets again later this month. The Fed has recently laid out its thoughts, for the most part, but changes could always be made based on the recent data stream. Both the U.S. and China have shown some weakness in recent data, and as the globe’s first and second-largest economies, that could spell trouble for the markets in the months ahead.

Fed Needs To Watch Its Step

The Fed may need to be increasingly careful as it looks to continue hiking rates aggressively. As recently as a couple of weeks ago, some market participants felt the Fed could begin to pivot away from its inflation fight. That does not appear to be the case, however, and Chief Powell has now made it abundantly clear that they intend to get inflation to desired levels before giving up.

The biggest question for markets right now may be whether the Fed actually has the tools necessary to calm inflation. During the last period of rampant inflation, Paul Volcker took interest rates to 20% to get price pressures under control. While such a move may or may not be necessary currently, one has to question if the Fed would be willing to take rates that high.

Is The Fed Unwilling To Do What It Takes?

If the Fed is truly unwilling to do what it takes to get inflation under control, then one has to wonder what the central bank could be doing early next year. The Fed seems to want to fight the notion that it will reverse course and start easing again. Markets are now pricing in string odds of either a 50 or 75-point hike this month. The Fed will also be meeting again before year’s end and could raise rates even more before 2022 comes to a close.



What the Fed might do next year should be on everyone’s minds. It does seem clear, after all, that stocks and risk assets are unlikely to remain higher or even stable in the face of rising rates. Public and political pressure is likely to mount on the Fed as it takes rates higher and squeezes investors.

When Might The Fed Cave?

At what point might the Fed cave? Some analysts are of the opinion that the Fed will hike rates a couple more times before reversing course on policy. If nothing else, the Fed could hike a few more times and then decide to take a pause. Whatever the Fed decides to do, more economic pain will be on the way. If you are worried about economic pain, explore your options for gold ownership now.

That economic pain may keep a floor under gold prices in the months ahead. While gold can be sold to meet margin calls and for overall risk aversion, it is also oftentimes purchased during periods of time when investors just want to hang on. That is likely to be the scenario once the new year gets underway and gold could stand to benefit handsomely if the Fed does not deliver.

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