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Gold price caught between the Fed and the Gaza strip

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Gold had a rollercoaster ride this week with volumes rising to a multiple of their usual levels and prices spiking to a two-week high before plunging Thursday and then finally regrouping Friday.

The up …

Investors flocked to gold throughout the first half of this year seeking shelter from the uncertainty in the US and European economies and the frequent turbulence in the equity markets. However, over the last month the enthusiasm petered out as the Fed started signalling that it might be done with its rate rise cycle.

The violent turn of events in Israel last weekend changed the tide again, prompting a strong increase in gold buying volumes.

Investment firm The Pure Gold Company reports that buyers’ enquiries had risen 400% since Saturday compared with the average daily volume this year. “This significant uptick in interest mirrors the pattern seen in the early days of the Russia/Ukraine war, reflecting a flight to asset safety in the face of geopolitical risk,” said Josh Saul, chief executive of The Pure Gold Company.

Investors are concerned that other countries could end up being dragged into the conflict creating contagion in equities, currencies and property.

“For example, in the first weeks of the Ukraine war, the FTSE 100 fell over 6% as concerns over the impact of the war deepened. So far international markets have held their ground since the conflict started on Saturday, but there is potential for volatility if the situation deteriorates further,” Saul noted.

From previous conflicts we know that geopolitical instability tends to create a strong gold buying impetus but that this type of rally normally doesn’t last very long. Within weeks prices tend to correct down close to their pre-conflict levels. It remains to be seen how widespread and lasting the current conflict will end up being and if there will be a wider fallout, including an increase in oil prices. If so, gold would be supported at the higher end of its current trading range.


And the down …

The second key mover of gold prices this week has been the strength of the dollar – related to the state of the US economy and potential Federal Reserve rate decisions over the next two months. Higher than expected US inflation numbers released Thursday caused the dollar to gain 0.76%, US Treasury yields to rise and, subsequently, gold prices to dip.

US inflation clocked a 3.7% year-on-year increase in September while core inflation excluding food and energy ticked higher to 4.1%. Currency and bond traders are positioning themselves for a possible further US rate increase in December (the CME FedWatch numbers show a likelihood of over 37% for a 0.25% rate increase in December) which will keep a cap on gold prices.

Chart picture

Looking at the moving averages gold looks set to head lower in the short term but hold strong in the medium to longer term.

In September the 50-day moving average crossed the 200-day moving average on the way down, a chart pattern ominously known as the dead cross because it causes heavy selling However, the 200-day moving average still indicates an upward trend.

Once the yield rates stop rising this chart pattern will support the price of gold.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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