Gold Outlook

Gold has been frustrating bulls and bears over the past 6 months with multiple moves up and down that always reverted back towards $1800 per oz. Could this be about to change?

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Why aren't gold prices moving?

Conventional wisdom suggests that as a hedge against inflation, gold should be an attractive investment when we have a surge in consumer prices. Yet the price of gold has remained essentially flat for over a year now, despite policymakers finally admitting that inflation is not temporary.

The presumption is that central banks taking action against inflation means it will be brought under control. So, even though there is high inflation now, it won’t last - so the thinking goes. Add to that gold’s lack of yield and interest-bearing bonds would be expected to become a more attractive investment than gold.

Two schools of thought

The problem with the above outlook is that it assumes that the Fed's intervention will curtail inflation. On the other hand, the Fed has argued that supply chain issues have caused the current bout of inflation. While the Fed can reduce market liquidity and increase the cost of credit, it can't get ships unloaded faster!

Higher rates increase the risk of a recession - or, at least, less robust growth - meaning gold could find new wings in the coming months both as a haven and possibly as an inflation hedge if the Fed’ cuts short its scheduled rate hikes. This is the view projected in a recent note by Goldman Sachs, forecasting gold rising in the coming months as the US battles economic slowdown with high inflation. The technical term is "stagflation".

XAU/USD Going Forward

XAU/USD ended last year 3.7% lower. It was an annual loss in a year in which stock markets boomed double digits, but was arguably a relatively good performance given a rising dollar.

The recent bounce near the 200-day average and $1880 /oz could resume the short-term uptrend towards $1850/oz and even recapture multi-year levels at $1900/oz.

Below the 200 DMA and $1800, bulls are more likely to succumb. Gold prices could be brought back to $1780, then $1750.

The recent pattern has been breaking above and below 1850 and 1750, which eventually failed. For a new trend to emerge, these breakouts need to hold the respective support/resistance on any re-test.

Source: Spreadex Trading Platform

Key Takeaways

Too many speculative changes around the Fed's position have offered several opportunities to swing traders. But none so far for trend traders.

To some extent it's a waiting game for the Fed. Should it decide to take a more aggressive hiking stance to combat inflation- or back off on rate hikes because growth is slowing? Investors would do well to keep an eye on growth and supply-chain issues and prepare to embrace volatility.