Gold’s Impressive Advance Now Shows Signs Of Possible Fatigue

Gold has experienced a sizeable rise since the rather mixed jobs report from the US Department of Labor Statistics on November the 4th. The 261,000 jobs added to the US economy in September was overshadowed by the fact it’s the lowest of recent jobs prints as the unemployment rate actually rose to 3.7%, resulting in downward revisions of the Fed’s terminal rate and a lower estimate for the FOMC’s final rate-setting meeting of the year.

As such, the US dollar sold off as markets trimmed USD positioning in anticipation of slower Fed hikes in response to the higher unemployment rate – an indication that rate hikes are weighing on financial markets. The lower USD makes gold more attractive for foreign investors, which can lead to a lift in gold prices.

More recently, however, The surprisingly lower US CPI print on Thursday created mass optimism that inflation is coming down and rate hikes may not remain as high, for as long as anticipated. We are yet to hear from Jerome Powell on the market’s recent optimism but a number of other Fed officials have stressed that more compelling evidence is needed before the Fed can think about altering its current path. US treasuries rose (yields declined) and the dollar selloff intensified.

US Treasury yields tend to move inversely to gold prices because, at times when yields are rising, the non-interest-bearing yellow metal is seen as a less favorable alternative. The chart below shows this dynamic which has been fairly strong as late – revealed by the correlation coefficient indicator as the two assets continue to be negatively correlated.

Gold (yellow line) vs 10 Year US Treasury Yield (candles)

(Click on image to enlarge)

Source: TradingView, prepared by Richard Snow

Unsurprisingly, the largest gold ETF has experienced inflows as the price of gold has risen sharply. Before that, gold has actually been broadly declining, resulting in fairly consistent outflows.

GLD ETF Flows

Source: TradingView, prepared by Richard Snow
 

Gold (XAU/USD) Technical Analysis

Gold’s upside momentum appears to be showing signs of a possible slowdown. The near 10% advance off the November low appears under threat as price action trades lower on Monday, ahead of the 38.2% Fibonacci retracement of the March to September decline at 1788.

The RSI reveals that gold traded temporarily at oversold levels before dipping back into the ‘normal’ range – hinting of a potential retracement of the recent bullish move. If we do see a retracement, 1722 appears as confluence support (September 2021 low and the 23.6% Fib level) with 1676 a lot further down. Upside levels of resistance remain fairly strong at the above-mentioned 1788 mark, followed by the psychological level of 1800.

Gold Daily Chart

(Click on image to enlarge)

Source: TradingView, prepared by Richard Snow

It’s difficult to ignore the fundamental landscape of higher interest rates (globally) and red-hot inflation, which only motivates central bankers to maintain higher interest rates until such time as they are convinced inflation is returning towards target (2% in the US). CPI of 7.7% is more than 3 times the Fed’s target, meaning contractionary monetary policy appears set to continue, capping upside potential for the precious metal over the long-term.

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