That compact explanation for why gold is trading higher today is usually reserved for the long-run. Day-to-day, it’s hard to tell why gold is moving higher, but stringing a few days together could produce a reasonable rally over the near-term.
I don’t believe the analysts who say gold is rallying on worries over rising inflation and supply chain issues because if inflation were to get out of control, the Federal Reserve or any other central bank for that matter would pull in its stimulus at a faster-than-expected pace and raise interest rates sooner-than-currently expected and more aggressively. These moves would stop the gold rally in its tracks.
I do believe that the strength in gold is reflecting a new concern that the Fed is not moving fast enough to stem the potential impact of high inflation. It is possible that policymakers have miscalculated the strength and duration of the current inflationary environment, after all, they did eliminate the term “transitory” in their September monetary policy statement with at least one choosing to call it “episodic”
The difference in the two beliefs has to do with the expected duration of the current rally in gold.
If gold traders really believed that inflation would get out of control, prices would be soaring. Speculators would be buying highs, taking out resistance and knocking out the buy stops set by weak shorts. Instead, the current rally is being fueled by short-covering and speculators buying dips.
Speculative buyers coming in on the dips are helping to fuel the short-covering, but until the buying is strong enough to overcome the traders selling rallies, the market is likely to remain inside a volatile trading range.
So I have to conclude that aggressive speculative buyers are coming in on the dips because they believe the Fed is moving too slow in the tightening process, and sellers are coming in to stop the rallies because they believe that U.S. policymakers will eventually become more aggressive with its tapering and rate hikes.
Eventually something has to give, but we may not know that until the Fed releases its monetary policy statement following its November 2-3 meeting.
At that time, if the Fed comes across as hawkish, prices will fall on new shorting pressure and liquidation by speculative longs. If the Fed is dovish then buyers will continue to chip away at resistance and weak shorts will aggressive cover.
Essentially, clarity and conviction from the Fed regarding the pace of tapering and rate hikes will determine the next major move in gold.
Read More: Price of Gold Fundamental Daily Forecast