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Fueled By The Fed And Ukraine Tensions, Gold’s Charge Higher Isn’t Stopping

By Investing.com (Barani Krishnan/Investing.com)CommoditiesFeb 15, 2022 03:38AM ET
www.investing.com/analysis/fueled-by-the-fed-and-ukraine-tensions-golds-charge-higher-isnt-stopping-200617976
Fueled By The Fed And Ukraine Tensions, Gold’s Charge Higher Isn’t Stopping
By Investing.com (Barani Krishnan/Investing.com)   |  Feb 15, 2022 03:38AM ET
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There are various ways to describe the current rally in gold. Exciting, promising, enduring—they all fit.

One word, however, doesn't apply: parabolic.

Parabolic is what the oil rally is—rising 25% in just six weeks. Parabolic is also what the pandemic-fueled gold rally of 2020 was—rising from a low of $1,485 an ounce in March that year to a record high above $2,121 by August—before recovery from the virus unleashed new peaks in stocks that just peeled away the safe-haven appeal of bullion.

But with 2022 here, two new catalysts have arrived for equities and both are wreaking havoc on Wall Street while bolstering gold: Russia’s potential invasion of Ukraine and runaway inflation in the United States.

Yet, gold’s rally hasn’t been keeping pace with the decimation of stock prices on the S&P 500 or NASDAQ, which have been losing 40 and 400 points, respectively, on many days since the year began.

Gold Daily Chart
Gold Daily Chart

Charts courtesy of skcharting.com

Bullion started January above $1,800, then fell to around $1,781 before systemically gaining strength by breaking past one resistance point after another—first at $1,830, then $1,850 and on Monday at $1,870 (which incidentally marked a three-month high too).

It’s this organic, block-upon-block build that’s giving confidence to those following bullion’s charge since the start of the year that it isn’t going to stop until it reaches at least $1,900—and could very likely continue thereafter in a bid for a new record high above $2,000.

“It's been a one-way run for gold from the low of $1,780 in late January,” economist Adam Button said in a post on the ForexLive platform on Monday.

"The next major hurdle is the November high of $1,876 and we're now within striking distance of that. Also notable is that a close above $1,866 would be the highest since June."

As Button puts it, it's tough to separate the inflation story and the Russia-Ukraine story from the price action in gold.

"I can see a compelling argument for buying gold on central bank instability. The bond market is getting hammered daily and gold is a shelter from that."

“On Ukraine, there's always a bid in gold on geopolitical fears but Russia has enormous gold reserves and if it's sanctioned, those could be sold down to prop up the ruble. So, there are two-ways risks around a conflict. That said, the market is only moving in one direction and this could be the breakout of the massive wedge on the chart that's been building for two years.”

Ed Moya, analyst at online trading platform OANDA, had a similarly strong view on gold.

“Despite a 6.6 basis move higher to 2.003% with the 10-year Treasury yield, gold is rallying,” said Moya.

"The $1,880 level should prove to be key resistance for gold, but if that does not hold, bullish momentum could take prices to the $1,900 level. Gold is starting to garner strong interest as the need grows for protection against a Fed policy mistake, geopolitical risks, and growth concerns."

After months of dreary price action, gold bulls began seeing some sustained upward momentum from January as US inflation began blowing up.

Senior Federal Reserve banker James Bullard said on Monday that the Fed’s credibility will be on the line if it doesn't hike US interest rates adequately to fight runaway inflation.

"Our credibility is on the line here and we do have to react to the data,” Bullard, who is St. Louis Fed President, said during an appearance on CNBC.

"I do think we need to front-load more of our planned removal of accommodation than we would have previously. We’ve been surprised to the upside on inflation. This is a lot of inflation."

Gold Weekly Chart
Gold Weekly Chart

The Fed slashed interest rates to almost zero after the outbreak of the coronavirus pandemic in March 2020. It is expected to resort to a series of rate hikes this year to counter inflation, growing at its fastest pace in 40 years on the Consumer Price Index as well as the central bank's preferred inflation indicator—the Personal Consumption Expenditures Price Index.

Goldman Sachs said last week that it expects the Fed to institute seven quarter-percentage-point rate hikes this year, up from the Wall Street bank's previous forecast of five. The Federal Reserve has seven policy meetings scheduled between March and December, meaning it could raise rates every time it meets this year, if Goldman is right.

Bullard shocked markets last week by saying that he wished for the Fed to have a full percentage point increase by July 1. The central bank meets three times between March and July 1, meaning it has to increase rates by more than a quarter percentage point at least one time to achieve Bullard’s target.

"I think my position is a good one, and I’ll try to convince my colleagues that it’s a good one," Bullard said, adding that he would, however, defer to the decision by Fed Chair Jerome Powell. One of the more moderate voices of the central bank, Powell has said that the Fed will be "nimble" with rate hikes to ensure no excessive disruptions to the economy and markets.

Bullard said the inflation experienced by the United States was "very bad" for low- and moderate-income households.

"People are unhappy, consumer confidence is declining. This is not a good situation. We have to reassure people that we’re going to defend our inflation target and we’re going to get back to 2%."

The Fed is mandated to keep inflation at or below 2% a year while striving to grow the economy and achieve maximum employment, defined by a jobless rate of 4.0% or below.

Gold has also benefited from the rumblings of war from the Russia-Ukraine conflict.

Moscow invaded and annexed the Crimean Peninsula between February and March 2014, sparking an international outcry and a wave of economic sanctions. Experts fear the same fate for Ukraine this time, after a massive buildup of Russian forces at the Ukrainian border in recent weeks.

White House National Security Advisor Jake Sullivan said Russia could invade Ukraine "any day now," based on US intelligence. Moscow says it wants to end NATO’s expansion into Eastern Europe and has called for intensified talks between Washington and the non-aligned treaty organization.

Gold Monthly Chart
Gold Monthly Chart

Not all are too bullish about gold in the event of a non-invasion.

“When all is said and done with the whole Russia-Ukraine situation, gold may be left hanging with few reasons to be too optimistic amid a backdrop of rising interest rates across the globe,” currency analyst Justin Low said in a post on ForexLive.

“That will be something to consider even if commodities in general are facing a rather strong bullish cycle potentially.”

Still, gold’s charts don’t lie and bullion’s current charts point to a breakout, not fake out, said Sunil Kumar Dixit, chief technical strategist at skcharting.com.

"Gold confirms strong breakout above the previous $1,877 top and bullish mood is all pervasive across major time frames, be it daily, weekly and monthly with strong stochastics and RSI.

"As long as gold sustains above $1,860—which is a 23.6% Fibonacci level of retracement measured from $1,678 to $1,916. Bullish momentum remains intact in hot pursuit for $1,898-$1,916.

"If heat on the Russia-Ukraine conflict intensifies, the rush for flight to safety will take gold to $1,975, which is another $100 from its current price.”

In the event of any Russian de-escalation on Ukraine, the risk premium in gold could dilute and trigger sharp correction due to overbought RSI at 73 on the daily chart, said Dixit. "Gold could go through 1860 to 1825 in a flash. But since the main trend is bullish, buyers are likely to come in for value buying at the test of support areas."

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.

Fueled By The Fed And Ukraine Tensions, Gold’s Charge Higher Isn’t Stopping
 

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Fueled By The Fed And Ukraine Tensions, Gold’s Charge Higher Isn’t Stopping

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Comments (6)
Brian Poland
Brian Poland Feb 15, 2022 11:09AM ET
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1900 would be weak, i want to see gold 8x from here like in the 1970s
Tom Sc
Tom Sc Feb 15, 2022 9:31AM ET
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market likes to bury its head in the sand imho. everyone has forgot about China too now but I cant help but think Putin and Xi are around 70 years old and they will want to eventually see their impact cemented, for better or worse, before they die. these guys know the last thing the US will do is go to war with them over other people's land. I dont think we are nearly out of the woods yet. and as a side note, I'm waiting for inflation data to dip so that everyone can breathe a sigh of relief and Jerome can pat himself on the back only to watch it bounce and run even higher
SunilKumar Dixit
SunilKumarDixit Feb 15, 2022 9:31AM ET
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Tom Sc. Exactly so. This inflation is the demon created by the Fed and now beyond their own control. They tried hard to convince people that its transitory which is not. There is enough steam left for it to run.
MuraliKrishna Brahmandam
MuraliKrishna Brahmandam Feb 15, 2022 6:48AM ET
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charge stopping
MuraliKrishna Brahmandam
MuraliKrishna Brahmandam Feb 15, 2022 6:47AM ET
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Pull back is just a part of the game; that happens many times
Barani Krishnan
Barani Krishnan Feb 15, 2022 6:47AM ET
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Yes, Murali. As I told someone else below, since this whole war c(rap) started, I had been suspicious whether any real fighting would break out since the stakes were incredibly high for the Russians if they went all the way. I went with the majority's view in writing my outlooks because that was the flow in the markets. But deep down, I also felt that Putin wanted control and he wanted to show the world he had control. It was the highest grandstanding on the highest global stage, and he got what he wanted. This way, they can say all Moscow wanted were drills for its troops. "We are not sure why that was even interpreted as war maneuvers," will be the party line now out of the Kremlin. Anyway, for better or worse, markets can return to their regular mode (hopefully Putin doesn't retract on the exit). Like Sunil Kumar Dixit said, some retrenchment from this highs are very likely for gold, and it has begun. Let's see where gold ends up.
SunilKumar Dixit
SunilKumarDixit Feb 15, 2022 6:47AM ET
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Barani Krishnan sire. The news of small de-escalation acted heavily on the rally. All the same, the Breakout test of 1880 was phenomenal considering the long consolidation.
Mma Boxing
Mma Boxing Feb 15, 2022 6:37AM ET
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puff noob
Edward Chong
Edward Chong Feb 15, 2022 5:13AM ET
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pull back already. all the swings start again. sigh...........
Barani Krishnan
Barani Krishnan Feb 15, 2022 5:13AM ET
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Yes, Edward. Read my post below.
SunilKumar Dixit
SunilKumarDixit Feb 15, 2022 5:13AM ET
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Edward. Pull back started and started with a bang harder than the rise.
 
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