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Gold continues to edge higher as investors focus upon rising inflation

Commentaries & Views

Gold futures had modest gains in trading today as investors focus upon the recent CPI inflation index data indicating that inflation is running at a 40-year high at 6.8% year over year. With inflationary levels at their current level, market participants are waiting for the FOMC meeting to begin tomorrow and conclude on Wednesday. They will be looking at how the Federal Reserve plans to deal with the current level of inflation in regards to their current monetary policy.

Expectations continue to be that the Fed will accelerate its timeline for tapering its monthly asset purchases. Currently, the Federal Reserve has been tapering its monthly asset purchases by $15 billion each month. This would take until June to complete the tapering process to a net-zero monthly accumulation. However, with inflationary pressures so high, they cannot begin "lift-off" or interest rate hikes before the completion of that task.

So, the question becomes how will the Federal Reserve adjust its current monetary policy to address the high levels of inflation? The expectation is that they must tighten their monetary policy and adjust the timeline to begin raising interest rates. This is what makes the release of the "dot plot" such a critical component that market participants will examine. If, as expected, they accelerate the timeline to complete the tapering process, it will mean they can raise rates quicker than they projected.

However, their actions will require a very intricate balancing act in which they raise rates in attempts to slow down the rate in which inflation has been rising and do the least amount of damage to the economic recovery that their extremely accommodative monetary policy made possible. This upcoming FOMC meeting will be one of the most important meetings this year with the potential to reveal the greatest adjustment to their tapering process as well as the number of rate hikes they believe are necessary for 2022.

Unquestionably, many analysts and economists believe that the Federal Reserve has backed itself into a corner by not reacting sooner to the spiraling level of inflation. The net result is that the Federal Reserve has become reactionary rather than proactive regarding its monetary policy. This can be seen in recent statements that are much more hawkish than prior statements by Chairman Powell.

According to CNBC, Bob Haberkorn, senior market strategist at RJO Futures said, "The fact that no one is expecting a rate increase this week by any central bank is lending some support to gold" and unless the Fed announces immediate rate hikes next quarter, gold could be over $1,800 by the year-end."

CNBC also quoted Michael Hewson, chief market analyst at CMC Markets UK, who said, "In the short- to medium-term, gold's not going anywhere until we get an idea of how much the Fed accelerates tapering and whether or not they are particularly hawkish in their statement,"

Our technical studies indicate that gold closed above minor resistance, which occurs at $1784.90, based on the 78% retracement of the rally, which began on November 3 and concluded on November 16. That rally took gold prices from a low of $1758 to a high of $1879. Our studies also indicate that major resistance occurs between $1800, a key psychological level and $1805 the 61.8% Fibonacci retracement from the data set mentioned above. Currently, we see the first level of support at $1770, with major support at $1758, the low achieved on November 3.

However, that being said, gold will react to the statement and press conference by Chairman Powell on December 15.

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Wishing you as always good trading and good health,

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