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Should the Federal Reserve raise rates by a larger margin, the US dollar would likely experience a significant boost, placing downward pressure on the gold market.
- Gold markets have experienced a period of relative calm during Wednesday’s trading session, as investors anxiously await the Federal Reserve’s statement and results from the FOMC meeting.
- Presently, global concerns revolve around the actions of central banks, with the Federal Reserve being the most influential among them.
- Recent rate hikes from the European Central Bank (ECB) and other central banks worldwide signal that the Federal Reserve is also expected to raise rates. Market participants are currently anticipating a 25 basis point increase.
Should the Federal Reserve raise rates by a larger margin, the US dollar would likely experience a significant boost, placing downward pressure on the gold market. Conversely, market pressure on the Federal Reserve to cut rates has recently fueled a surge in gold prices. Regardless, gold’s rapid ascent appears to have been unsustainable, resulting in a subsequent pullback. This development was inevitable, given that market momentum cannot remain parabolic indefinitely.
The gold market’s breach of the psychologically significant $2,000 level may have also contributed to recent volatility. Options barriers could have played a role, as the market experienced a drastic selloff after surpassing this threshold, losing approximately $50 within two days. Consequently, the stage may be set for another upward move, but investors should wait for the Federal Reserve’s announcement before confidently committing capital. This cautious approach could present an opportunity to purchase gold at a more attractive price, potentially near the $1,900 mark where the 50-Day EMA may intersect.
Shorting gold would be very difficult in general at this point, as we have seen so much strength over the last several weeks. However, the Federal Reserve getting extraordinarily tight could cause chaos in the bond market, and that’s exactly what I would be worried about. Conversely, if the Federal Reserve were to be loose with monetary policy, or even shock the market by not raising it all, it could send gold straight up in the air. I think the next couple of days should be very telling as to where we go in the future, but ultimately, I think this is a scenario where you have to look at it through the prism of trying to find value unless of course, the Federal Reserve shocks the entire world. It’s very unlikely they will because quite frankly the last thing they want to do is kick off more inflation.
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