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Precious metals have been under pressure since Friday, until finding some support on Wednesday. In the first half of Thursday’s session, gold climbed higher as the bulls looked to recapture and form a base around $2000, a level, which like March last year, has again proved to be a tough nut to crack. It remains to be seen whether it can kick on from here or continue to chop and churn as traders assess conflicting macro signals.

Before discussing the macro influences in greater detail, let’s have a quick look at the XAUUSD chart:

Source: TradingView.com

The precious metal formed a hammer off the still-rising 21-day exponential moving average on Thursday, providing us with a potentially bullish signal. A close above the $2K level on Thursday would boost the metal’s appeal from a bullish point of view. The bears will want to see a close below support at $1980ish.
 

Why has gold struggled above $2K?

The recent weakness in gold prices had been driven mainly by profit-taking and a short-covering rally in the US dollar and weakness in government bond prices, causing yields to rise.

On the former front, it makes good technical sense, doesn’t it? I mean if you look at the historical chart of gold, the area around $2K has been strong resistance in the last three years or so. Each time gold has tried to break away from the zone, we have seen a sharp rejection. Clearly, some gold speculators are taking no chances and are happy to book healthy profits on their long trades accumulated in the last couple of months or so. This of course doesn’t mean that gold can’t go further up. Of course, it can, and I believe it eventually will hit a new record high. But you get my point.

On the latter point – about the US dollar index and yields both rising recently – it is all because of hawkish Fed and ECB rhetoric and evidence of inflation remaining sticky in the UK and Eurozone. While this has been offset by signs of peak inflation and weakening economic activity in the US, that has not been enough to appease the hawks at the FOMC camp. A couple of Fed officials such as Christopher Waller and John Williams have come out and said that US interest rates need to be tightened further.
 

So, why has gold bounced back?

Well, you guessed it. Yields and the dollar have both fallen back on Thursday, thanks to further weakness in US data and a hawkish speech by ECB President Christine Lagarde:

• Lagarde: Need to do all we can to bring back inflation to the 2% target (good for EUR, bad for USD)
• US initial jobless claims 245K – a 17-month high – versus 240K expected
• US April Philly Fed -31.3 versus -19.2 expected
   

Can gold climb to a record high?

Judging by the above softer-than-expected macro indicators, there is a good possibility we could see the US dollar resume lower and provide support for gold and silver. The greenback could fall more profoundly against currencies where the central bank still remains hawkish, or the economic backdrop is improving relative to the US. In the US, inflation has already dropped to a 5% annual rate and looks to be heading further lower as we will see the impact of the big inflation spikes of last year come out of the annual inflation measure. This means that without any further inflation setback, we will get a lot closer to the Fed’s 2% target especially if the economic output falls more significantly than expected in the months ahead.

Therefore, investors may start betting that the Fed will stop hiking interest rates past May, and soon the central bank may even start loosening its policy again if the economy continues to weaken. Remember that the impact of the past rate hikes will be filtering through the economy, while there’s always the risk of some other macro factor emerging to the detriment of economic output. 

This puts Friday’s publication of the latest purchasing managers’ indices in sharp focus. Investors are slowly focusing more and more on growth and employment data than just inflation and wages – as evidenced, for example, by a quick 50-pip drop in the USD/JPY pair on the back of today’s US Philly Fed survey. See the economic calendar for more.

So, while some uncertainty remains on the short-term direction of prices, my longer-term gold outlook remains positive. I, therefore, envisage a rise to a new record high soon.

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