Haven gold closes in on zone of resistance
Gold has made a positive start to the year and is handsomely outperforming both equity markets and bonds. It seems there is no place like gold when it comes to times of stress and rampant price pressures. Skittish investors always require safe assets to park cash when uncertainty and volatility are elevated.
The precious metal has climbed more than 6% this month and has broken above $1900. The geopolitical crisis in Ukraine has provided the impetus for the advance, although many gold watchers believe gold is also benefitting from worries that US growth could slow as the Federal Reserve is forced to raise rates aggressively in order to get inflation under control.
JP Morgan is the latest Wall Street bank to up its forecast for interest rate hikes by the Fed, believing that policymakers will move nine times in consecutive meetings, starting next month.
Certainly, the potential for an inflation-induced monetary policy error and rising recession risks are pleasing gold bugs.
Diversification, momentum and positioning
Aside from being a hedge against a policy mistake, gold acts as a default hedge against military conflict in Ukraine with geopolitical tensions currently outweighing rising real yields. The relationship between gold and inflation-adjusted “real” interest rates has started to weaken amid concerns about the economic outlook and soaring prices. A relatively subdued dollar is also underpinning gold’s path higher.
The precious metal has a relatively low realised volatility, both from a correlation and volatility perspective, so offers diversification in the current environment. This quality has seen ETF flows increase this year after falling in 2021. Investment demand is a positive and investors have also been actively adding new positions in physical gold. Lean speculative positions leave room for a build-up of fresh longs and limited liquidation risk.
Heading towards $1916
After trading around the long-term simple moving averages at the start of the month, gold has surged higher enjoying its fourth straight week of gains. Prices pushed up to the November high at $1877 last week before consolidating bullishly below this level.
The key test for bugs will be the June 2021 high at $1916. This forms a band of resistance with the 61.8% Fib level of the large sell-off wave from the 2020 top to the 2021 lows, at $1922.70. Levels above here are $1959/65 before the next Fib level (78.6%) just below $1990 and the 2020 top at $2074.77. The daily RSI is in overbought territory, though this can continue for an extended period. Support is $1875-$1877.