Trade of the week: Calm Before The Gold Storm?

Fasten your seatbelts and tighten up because this could be a wild week for gold!

After experiencing wild rollercoaster swings in May, the precious metal could kick off June with a bang. Gold remains pulled and tugged by various forces ranging from a weaker dollar, Fed hike expectations, Treasury yields, inflation jitters, recessions fears, and heightened geopolitical risks. The fundamentals can be reflected in the choppy price action and periods of calm as bulls and bears bump heads. Prices are trading around $1856 as of writing which is below last week’s high. The key question is whether the current move is a technical bounce to higher levels of another ‘dead cat bounce’.

The low down…

Lately, gold bugs have been drawing strength from a weaker dollar and subdued treasury yields.

Minutes from the latest Fed meeting struck a less hawkish tone which provided a tail-wind to zero-yielding gold. With investors seeing the central bank adopting a flexible approach on future rate hikes, this could drag the dollar lower – ultimately offering further support to gold. However, as the focus increases on economic data and markets become more sensitive to rate hike expectations, this could result in more dollar & gold volatility.

It is worth keeping in mind that the Fed hiked rates by 25 basis points in March and 50 basis points in May. The central bank is expected to raise interest rates at every meeting policy meeting for the rest of 2022.

Gold ETF Outflows favour bullish outlook

According to an automated report from Bloomberg, gold ETFs added 34,866 troy ounces of gold to their holdings last Friday. An Exchange Trade Fund (EFT) is an investment instrument that allows retail traders to gain exposure to an existing market or group of markets. In this scenario, a gold ETF gives investors exposure to gold without having to own it physically.

Inflows from ETFs are generally seen as bullish for the underlying asset. Given how the dollar remains on a slippery decline, Treasury yields are subdued and the Fed seems less hawkish than expected, it looks like investor may be increasing their exposure to the precious metal.

Is Gold waiting for the US jobs report?

The US jobs report on Friday will set the tone for gold in the near term.

Markets are forecasting the US economy to have created 329k jobs in May with the unemployment rate dropping to 3.5% and average hourly wages seen rising 0.4%. Dollar bulls could have the opportunity to fight back if the report matches or surpasses forecasts. A strong set of results in May could enforce fresh pressure on the Fed to maintain its aggressive approach towards rates – ultimately pressuring gold prices. 

Alternatively, a disappointing jobs report could encourage investors to fully embrace the Fed’s flexible approach toward interest rates – providing gold bulls some space to fight back.

Breakout on the horizon?

Prices are trading below the 50 and 100 SMA but support can be found above the 200-day Simple Moving Average at $1839.

There seems to be a range with resistance seen at $1870 and the $1839 acting as a minor floor. A solid weekly close above $1870 may encourage an incline towards $1892 and $1900, respectively. Sustained weakness under $1870 is seen opening the doors towards the 200-day SMA at $1839 and $1800, respectively.

Gold FED FOMC Treasury yields inflation Geopolitics