Gold is seeing some slight selling today following yesterday’s solid gains. The yellow metal is lower by about $8 per ounce as of this post as stocks see strong gains, crude oil climbs and the dollar index rises.
Gold remains susceptible to interest rate speculation and any data that may potentially bolster the case for an interest rate hike by the Fed.
Second quarter GDP data released this morning showed stronger economic activity than anticipated-although not by much. Of note was the increase in personal spending which drove GDP and may be indicative of increasing economic optimism among consumers. This better-than-expected GDP data will likely give the Fed more reason to move forward with an initial hike this year.
Fed Chairwoman Janet Yellen spoke yesterday afternoon and made her case for raising rates this year. Ms. Yellen, perhaps, wanted to make it very clear that the FOMC’s latest decision to hold rates steady — for now — was not a departure from expected policy change this year and lift-off before the end of the year.
Ms. Yellen also discussed the outlook on inflation and her belief that inflationary pressures should start to build in the coming years. She further discussed the effects of a stronger dollar, falling crude oil prices and falling import prices on inflation; she feels that once these headwinds have diminished, inflation will gradually begin to build.
Inflation has lagged the central bank’s target for some time now, and the apparent inability of recent policy thus far to spark inflation has been a cause for concern.
This lack of inflation has also, perhaps, been a significant weight on gold and other hard assets in recent years. Signs of inflationary pressures could potentially benefit gold and precious metals in the long-term, although it would seem that such pressures may still be a ways off.
Although the gold market may have, at this point, digested the notion of a forthcoming rate hike, the market may still be vulnerable to further selling once the Fed takes action. Recent buying activity seen in gold has likely been a mix of short covering and bargain hunting. Gold has thus far not, however, been able to put together a sustainable rally in price. For now, bargain buying may potentially have exhausted itself and without further upside gold may see sellers once again becoming more aggressive.
Gold may simply trade sideways until the Fed does act, at which point the bulls will have to step up or prices could potentially return to recent lows or perhaps begin another leg lower in price. Should gold start making fresh lows, however, it could possibly indicate a move to what could potentially turn into a long-term bottom.
