GOLD ANALYSIS

Powell – “time to retire the word transitory”.Symmetrical triangle support in question.IG client sentiment supports further downside.

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BULLION FUNDAMENTAL BACKDROP

Spot gold was propped up today after the Moderna CEO questioned the effectiveness of current vaccines on the new Omicron variant. The statement unleashed a risk-off bias allowing for gold‘s safe-haven appeal to come to the fore.

FED CHAIR POWELL TESTIMONY: OMICRON, ECONOMIC GROWTH AND INFLATION

Yesterday, Fed Chair Powell outlined the potential for the new variant to hamper U.S. economic growth prospects as was the case under the delta variant. Leading up to the Omicron disturbance, markets viewed the Fed as slightly hawkish thus bolstering the greenback to levels last seen in mid-2020. Powell continued to raise concerns around the variants impact on inflation and could lead to higher sustained inflation as supply chain constraints are exacerbated.

During today’s testimony, Fed Chair Powell touched on the termination of the ‘transitory’ reference triggering a market reversal. Gold was no exception slipping well below $1800.

With prospects of asset purchases ending sooner than expectedremaining (as per Fed Chair Powell’s testimony) – Chair Powell outlined the appropriateness to discuss wrapping up tapering sooner than expected in the next FOMC meeting while taking into account the additional data that will be available at that time. The dollar is now being reviewedhigher – previously under a dovish bias (read more in my dollar analysis here).

Once markets digest the testimony, the issue of slowing economic growth and persistent inflationary pressure could see the ‘stagflation’ debate regain traction. Gold prices could benefit from this type of economic backdrop but remains tied to additional Omicron data.

Following on the inflation viewpoint, European inflation continues to climb beating estimates earlier today. This again adds to the ‘sticky’ interpretation of inflation and should favour gold upside.

Gold volatility (see chart below) is also on the rise – commensurate with price action, and now testing June highs. Gold volatility can be a blessing or a curse for spot gold prices (with correlations varying over time) but with the dollar looking bearish under current circumstances, an uptick in GVZ could lead to a stronger gold price.

CBOE GOLD ETF VOLATILITY INDEX (GVZ):

Source: CBOE

GOLD ECONOMIC CALENDAR

Later this week, NFP and PMI (see economic calendar below) prints dominate the calendar and could lead to more complexity for the Fed should actual figures beat estimates. Data beats will add to the recent tightening pressure while Omicron uncertainties linger.

Source: DailyFX economic calendar

TECHNICAL ANALYSIS

GOLD PRICE DAILY CHART

Chart prepared by Warren Venketas, IG

Price action has recently tip-toed around the $1800 psychological zone and a daily candle close above this key level may present further upside opportunities. Additionally, the 100-day EMA (yellow) coincides with the $1800 level thus reinforcing its current importance.

After Fed Chair Powell’s testimony, the medium-term symmetrical triangle (black) is now under pressure after bears pushed below $1800 and trendline support.

Resistance levels:

1813.321800.001775.00

Support levels:

1758.891721.64

IG CLIENT SENTIMENT DATA BEARISH

IGCS shows retail traders are currently distinctly short on spotgold, with 81.87% of traders currently holding long positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment and the fact traders are net-long is suggestive of a short-term bearish inclination.

Contact and follow Warren on Twitter: @WVenketas

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