Trade Of The Week: Is All That Glitters Gold?

Gold has been on a tear this month.

The precious metal kicked off the new week on a solid note, smashing into $2000 after the United States said it may ban Russian oil imports with its European allies over the weekend. Prices peaked just above $2002 before later sinking as low as $1960.84 only for bulls to later re-enter the scene. Given how the latest developments could fuel fears around rising inflation and slowing economic growth, gold certainly has the potential to shine through the chaos.

Heightened levels of uncertainty and mounting caution from geopolitical risks continue to accelerate the flight to safety. This has sent investors rushing towards bonds, pushing down Treasury yields – ultimately making non-interest rate bearing gold seem more attractive. The 10 Year Treasury yield has dipped as low as 1.67, a level not seen since early January 2022.

Given how the Russia-Ukraine tensions could lead to a stagflation scenario, investors remain on edge. It will be interesting to see how central banks respond to the combination of rising inflation and low economic growth. Nevertheless, the Federal Reserve is still expected to raise interest rates this month, along with the Bank of England and Bank of Canada. With fears around the “S” word likely fuel the risk-off mode, this adds to the growing list of themes supporting gold bugs.

Taking a quick look at the technicals, prices have jumped roughly $100 since the start of March amid the risk-off mood. With caution likely to remain the name of the game over the next few days to weeks, the path of least resistance for gold certainly points north.

Focusing on this week’s economic calendar, there are a couple of key economic releases but all eyes will be on the latest US inflation numbers released on Thursday.

US inflation data likely to impact gold

Inflation in the United States remains at uncomfortable levels with consumer prices accelerating 7.5% in January, its highest levels in 40 years. February’s inflation data is expected to show inflation jumping to 7.8%, sealing the 25bps Fed rate hike next week. While such a development could weigh on zero-yielding gold, a red-hot CPI report may limit downside losses due to its repuation as an inflation hedge.

Should the report miss expectations, this could raise expectations over consumer prices cooling. This outcome could prompt investors to further re-evaluate the Fed’s aggressive policy stance. If the dollar ends up weakening and rate hike bets recede, gold may be offered a tailwind to push higher.

ETFs increase Gold holdings

According to an automated report from Bloomberg, gold ETFs added 247,243 troy announces of gold to their holdings last Friday despite the strong US jobs report.

Total gold held by ETFs rose 3.8% this year to 101.6 million – marking its highest level since mid-March 2021. The inflows may be the product of heightened geopolitical risks, extreme levels of uncertainty and concerns around rising inflation.  A gold ETF provides investors exposure to gold without owning it physically. Inflows are seen as bullish for the underlying asset.

Can Gold keep above $2000?

The last time gold traded above the psychological $2000 level was back in August 2020.

Gold has gained roughly 9% year-to-date with bulls clearly in a position of power. A strong daily close above $2000 could open the doors towards $2030 and the all-time high at $2074.77.

Should $2000 prove to be a tough nut to crack, a decline back towards $1970, $1930 and $1900.

Looking at things from the weekly timeframe, the trend remains heavily bullish with the all-time high of $2074.77 acting as the first key point of interest. Beyond this level, it is uncharted territory.

XAU USD Geopolitics Tensions Risk-off Bonds FED inflation SMA