Faced with a dollar refusing to back down from 20-year highs, the trading goalposts in gold futures could widen from their current $50 an ounce to $70 as investors become increasingly unsure of the yellow metal’s standing as a hedge against political and economic risks.
While gold futures got to the key $2,000 level within two weeks of the Ukraine invasion, reaching a 19-month high of $2,079 by Mar. 8, they stayed in that area for just five days and slipped below $1,900 within three weeks of the peak.
Since then, they have bobbed all over the place, returning to $2,000 on Apr. 18 before slumping to this week’s 4½ month low of under 1,786.
All charts courtesy of skcharting.com
Gold has always been volatile—with strategist Christopher Vecchio noting its ability to benefit more from swings than the dollar and bonds—but recent world and market events have done little for both longs and shorts in the metal.
“Gold prices have not been able to sustain a meaningful bid,” Vecchio wrote in a Daily FX blog that appeared on Monday.
“It remains the case that ‘a deeper setback appears increasingly likely henceforth’, particularly as weekly momentum indicators take a deeper turn south.”
What it means is that while gold is identified as a hedge against the dollar, it really isn’t; not with the greenback’s current trajectory amid aggressive rate hikes by the Federal Reserve that have, effectively, made it a greater haven than bullion.
Bond yields on the 10-year note, the other major variable that decides the direction for gold, have come off their highs but not by much, leaving gold at the whim of the dollar still.
This leaves gold with the occasional chance to pop higher in sympathy with stocks and any Fed speak about the possibility of recession or otherwise.
“With the Fed telegraphing their every move, Fedspeak this week will be increasingly important, particularly as positioning is continuously squeezed with bearish sentiment building,” FXStreet said in a gold outlook issued this week.
It added:
“In turn, we continue to expect substantial selling flow to weigh on the yellow metal at a time when liquidity is scarce. Even with recent liquidations accounted for, positioning analytics still argue for the potential of additional pain for gold bugs.”
Craig Erlam, analyst at online trading platform OANDA, concurred with that view.
“The yellow metal has seriously fallen out of favor despite ongoing inflation concerns as central banks attempt to make up lost ground,” Erlam said.
“Even widespread risk aversion isn't helping gold and a much stronger dollar is making life very hard for it. Another break of $1,800 could be painful despite two successful defenses of it so far.”
Gold Futures Weekly
Charts show that gold’s near-$50 gap this week—between the Monday peak of $1,834.84 and Friday bottom of $1,785.40—could eventually expand to as wide as $70, said Sunil Kumar Dixit, chief technical strategist at skcharting.com.
“For now, gold’s price action reflects lack of enthusiasm from both teams bulls and bears as they await break of key trend levels,” Dixit said.
“Market participants try to discern where gold fits in the current scheme of things.”
Since dropping from the Apr. 18 high of $1,998, gold has continued on a bearish path for a fifth straight week after its settlement below the 50-week Exponential Moving Average of $1,848 and the 100-week Simple Moving Average of $1,840, said Dixit.
The current week began with extended corrections that pushed gold down to $1,786—before the rebound to $1,836 that brought the bears out again.
“The bulls are trying for $1,850 and above, to gather enough steam to march towards $1,880 - $1,900,” said Dixit, who bases his studies on the spot price of bullion.
“Bears, on the other hand, are cool with their target for $1,780 - $1,750,” he added.
Alternatively, gold’s weekly stochastic reading was approaching oversold territory, said Dixit, adding that this could open a new upside towards $1,850 and extended gains of $1,880 to $1,900.
At that point, the volatility could return, he cautions.
“Since the current trend is bearish, sellers are very likely to join for massive shorts aiming for $1,800 - $1,750 again.”
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.