Gold's rush to break US$1,900 on inflation expectations cut short by Fed's taper talk

GOLD is set to close the week on a sombre note after prices failed to rally past an expected break of the psychological US$1,900 an ounce level. Inflation expectations that fuelled the rally past a major stumbling block at US$1,850 earlier in the week, had their wings clipped by hints of the US Federal Reserve tapering its huge bond buying stimulus programme. Gold for June delivery on the CME Exchange touched a four-month high of US$1,891.3 an ounce before retreating after the Federal Market Open Committee meeting.

Tensions in the Middle East heightened geopolitical risk, with Israel pummelling Gaza with air strikes and Palestinian militants launching rockets at Israeli cities despite a flurry of US and regional diplomacy. Fighting has finally subsided after 11 days of violence.

Gold prices had been rising throughout the week on a range of fundamentals ranging from inflation expectations, a weaker dollar and subdued Treasury yields. Key US data last week showed a bigger-than-expected rise in consumer prices and a drop in weekly jobless claims to a 14-month low, intensifying prospects of higher interest rates, supporting gold as a store of value against rising prices.

Prices broke through resistance at US$1,850 as investors bought into inflation expectations when a New York Fed report showed a survey of record high prices paid by manufacturers in New York state.

The Fed stand so far has been that price pressures are arising from bottlenecks in supply chains struggling to cope with demand in an economy reopening after months of pandemic- suppression. The central bank insists that these inflationary pressures are "transitory" and will fade.

However, many investors remain sceptical, given upward pressure on not just commodity prices but wages too.

Beside wild gyrations in gold prices this week, the entire cryptocurrency market suffered heavy losses as major digital assets recorded double-digit losses. The total market capitalisation of cryptocurrency shrank more than US$350 billion mid-week before markets appeared to have seen the worst for the week. Chinese regulators had tightened restrictions on financial institutions and payment companies providing services related to cryptocurrencies, triggering the meltdown.

Talk is rife that the extreme price swings in cryptocurrencies may also have helped support bullion, with investors having second thoughts about the crypto market being a safe-haven replacement for gold.

Technical analysis for Comex June Gold Futures (GCM21)

Inflation expectations have been healthy for gold bulls who pushed gold prices past US$1,850 early in the week. The US$1,850 level is along a major trendline resistance sloping down from the US$2,000 highs established in August 2020.

Gold's rise to challenge the US$1,900 handle mid-week was cut short by hints of possible tapering of economic support measures. With the Comex GC June contract not being able to find the strength to break higher than US$1,892, selling pressure depressed the contract but the dip to US$1,850 found buying as the major resistance trendline became support.

The gold market appeared well supported by buying on dips. Besides the trendline at US$1,850, the 200-day EMA would also provide support. Last week a dip to US$1,808 to the 200-day EMA found buying emerging on the dip. Technical indicators on daily charts have also been supportive of higher prices with the 14-day RSI being in positive territory since the beginning of April.

If gold longs are able to convincingly push prices higher through US$1,900, it is very likely that bulls will gun for the US$1,950 level. On the other hand, if prices stall and turn around and break down in a spate of selling pressure, the double bottom below US$1,700 level is highly supportive from a technical perspective.

Thus, the present leg of the great gold bull run that commenced at end-2015 should not be discounted. A number of analysts that have lately maintained their bullish call but have lowered their target from US$2,000 an ounce for gold this year to average about US$1,950 an ounce, are considering raising their price targets again.

• The writer is senior manager, commodities, Phillip Futures