Gold upside breakout hits resistance
The shiny, yellow metal enjoyed its best day in seven months on Wednesday. Surging nearly $40, gold was boosted by US Treasury yields in the long end moving lower. In turn, this saw a sharp selloff in the dollar, which hit resistance after making one-year highs on Wednesday.
Gold bugs are now setting their eyes on the September highs around $1834. But there are some technical levels around $1800 which must be negotiated first.
Concerns about high inflation please gold bugs
The broader risk backdrop remains clouded with numerous uncertainties. This is benefitting gold, coupled with worries about inflation and a cooling of the global economy. Sticky US CPI data released yesterday fanned more price pressure fears, driving some investors towards safer assets.
Gold is traditionally seen as an inflation hedge and the recent firm inflation numbers may potentially see “team transitory” raise the white flag. We saw from the recent FOMC minutes that more policymakers are edging towards the start of tighter monetary policy due to inflation concerns. The debate around prices becoming more persistent has also been more obvious in recent Fed speakers. China factory-gate inflation rocketing to its highest since 1995 simply adds more fuel to the inflationistas.
Daily close above confluence of resistance is key
After tracking sideways for most of this month, gold burst higher yesterday. Short-term trendline resistance from the September top around $1760 was decisively taken out. Similarly, the 50-day moving average at $1777 and last week’s spike high at $1781, which now act as initial support.
Prices have moved up to the $1800 barrier where a few major technical levels reside, including the widely watched 100-day and 200-day simple moving averages. The halfway mark of the June high to August low move also sits just below here at $1797.
If bulls can close above this zone, the first near-term target comes in at the mid-September highs around $1808. All eyes will then be on the summer barrier and very clearly defined level at $1834.
We note that the stagflation debate is getting louder. If this comes to the fore, gold will especially delight in that environment. Interest rates would remain relatively low even as the Fed starts tapering.
