This has been one hell of a start to a new year if you are into volatility. For investors in expensive US technology and small cap stocks, as well as Bitcoin and gold, it has probably not been a happy new year at all.
In a bid to keep the U.S. economy from overheating amid high inflation and near-full employment, the FOMC indicated in their December policy sitting that the outlook “could warrant a potentially faster pace of policy rate normalization,” according to the minutes of that meeting.
So, paradoxically, it is high levels of inflation that has derailed the rally for both gold and Bitcoin. What investors in these assets need to see is a sharp drop in inflation to deter the Fed from tightening too fast. If that doesn’t happen then we may well see further struggles in both assets down the line.
Gold just can’t catch a break. After struggling throughout last year to attract fresh buyers, the start of this year has been equally poor. With the Fed potentially on course to tighten its policy more aggressively, causing renewed strength in bond yields, gold bulls are finding it difficult to justify buying aggressively right now.
The metal was unable to break above that $1830 key resistance level yet again as the sellers stepped in after the FOMC’s hawkish December meeting minutes were released last night. The selling has since gathered pace, causing the metal to dip to low $1790s, before bouncing back a little.
What bullish gold traders need to see is a clean break above $1830 to tip the balance back in their favour. Until that happens, proceed with a bit of caution even if gold is testing a key short-term support here around $1793 to $1800:
If the above-mentioned support gives way, then I would expect a sharp acceleration in the downtrend in the near-term outlook.
Of course, Bitcoin is a different animal and is less sensitive to traditional macro developments. The ongoing sell-off may attract long term investors to buy the dip as the crypto tests this long-term support zone between $40K to $43K (shaded):
Even so, this could be a challenging year for crypto bulls as the bullish momentum has not there for a couple of months now.
