Gold strangely finds comfort from the Fed hawkish tilt

A weekly market summary for gold, Jul 5-9

GOLD prices drifted higher this week and found a comfortable niche to hang on, around US$1,800 an ounce, in a short trading week for gold denominated in US dollars. Prices had moved back and forth with traders unwilling to price gold aggressively ahead of the last Federal Reserve meeting mid-week.

While the latest meet lacked clear clues, both hawkish and dovish traders found something to please them. Hawks confirmed the new tilt in the light of expected inflationary pressures ahead, and doves were comfortable with the expected inflationary pressures as rising levels would be transitory, and that the Fed had the tools to manage inflation. From the price action of bullion and other asset classes this week, one might say that the doves may have had an upper hand.

In reaction, the 10-year T-note yield slipped to a 4-1/2 low this week. Other global bond yields also drifted lower this week and had a positive effect on metals prices.

The dollar, meanwhile, had the most positive response, with the Dollar Index currently at levels last seen at end-March and poised to challenge fresh contract highs on perception that both US short-term and intermediate term rates would gather momentum. This is also reflected by shifts in the US bond yield curve.

The European Central Bank also announced the outcome of an 18-month strategy review redefining its inflation target, and gold bulls found it supportive.

Technical analysis for Comex August Gold Futures (GCQ21)

With the drama playing out in the crude oil market with Opec+ in disarray, crude oil prices are expected to remain volatile. Meanwhile, gold prices had been mostly dominated by short-term trading with dips below US$1,800.

There is a clearer picture of gold emerging on technical charts. A look at daily line charts of spot gold would show 2 "double bottoms" distinctly forming, although the pattern is not so discerning on a daily line chart of the Comex contract. The earlier major double bottom formation was in March at US$1,680 and the other was formed in June with the recovery from the recent sell-off. Double bottoms are considered by technical traders as key support levels.

However, it is too early to tell or confirm a change to a major bull run from gold's consolidation trend. The major 200-day and 50-day EMAs, used by traders to ascertain the trend, lie very near to US$1,820 for the GC active contract at press-time. A break above the resistance level accompanied by large volume for the day would be indicative of a resumption of a bull run.

On the other hand, I would assume that gold's time has not yet come if there is a breach of the "double bottoms", especially the one at US$1,680.

  • The writer is senior manager, commodities, Phillip Futures

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