With Russian separatists and Ukraine’s military seemingly lobbying shells at each other, and the White House cautioning NATO allies to expect a Russian false flag operation, uncertainty has crept back into financial markets. This time, it looks like gold is starting to respond, having shrugged off previous worries about inflation.
Those who read Henrik Mikkelsen’s column earlier this week on this site will know that gold was shaping up to jump somewhere – a lot seems to be dependent on events in Eastern Europe.
Gold surged more than 1.5% on Thursday and is a market definitely worth watching today (Friday). Though prices have eased back on the back of positive headlines from Russia, the risks remain skewed to the upside.
Main driver for gold is falling real yields
Indeed, it is not the first time this week where gold prices fell on the back of slight easing of geopolitical news, before resuming higher as we saw on Tuesday,” noted Victor Argonov, senior analyst with EXANTE. “The precious metal’s main driver is falling real yields, as a result of soaring inflation. Investors have been piling into gold as they presumably seek to protect their purchasing powers from being eroded by depreciating fiat currencies around the world. Inflation is everywhere. Prices are likely to remain elevated for longer, because of the renewed energy-price hikes of late.”
Gold is also likely to find buyers because of its technical breakout from the consolidation range it had been stuck inside for several months. With the bulls coming out on top, we are only likely to see further buying pressure come in as speculators seek to take advantage of momentum.
“Gold has already reached $1900, but this is only likely to be a temporary hurdle before we potentially see more gains,” Argonov said. “I reckon the breakout has paved the way for $2000, although last year’s high around $1920 is a more immediate target.”
Near term technical advantage for gold bulls
Gold bulls are deemed to have a solid overall near-term technical advantage in the gold futures market at the moment. Prices look to be in a steep uptrend and are likely to continue to be driven by news coming out of Ukraine. Traders are focusing on the next technical gold price target, which is sitting at the $1922.40 level established back in May. A technical support level is established at $1850.
Earlier in the week, gold’s negative response to the de-escalation of geopolitical tensions on Tuesday morning clearly suggests safe haven demand had helped support the precious metal. In the event the metal now resumes higher without any renewed escalation of tensions around Ukraine, this would also suggest that there is an even stronger force behind the recent price gains.
Don’t take your eye off the inflation numbers
Rising inflation levels around the world have more than offset concerns over policy tightening. In a way, this is understandable as real yields on the 10-year note are around -5.5%, which means that even if rates rise multiple times in the coming months, real yields will not move into the positive territory without a sharp fall in nominal inflation rate.
This should help to keep the appetite for gold high, as investors seek to protect their wealth from the cost of inflation by swapping their fiat currencies into what many consider the ultimate store of value: gold. “I think gold is still poised to reach $2,000 in the weeks ahead,” said Argonov at EXANTE.