- Despite setback dealt by March NFP, upside momentum has seized gold
- Cooling inflation, bets for Fed pause has underpinned new rally
- Futures have reached $15 short of record high, spot price $25 below peak
- Both futures, spot gold expected to hit at least $2,100
By the time you read this, gold may have a new record high or is on the way to making one.
The stronger-than-expected U.S. non-farm payrolls for March had only briefly stopped the snowballing momentum in gold, with the yellow metal seemingly rejuvenated in its quest for an all-time peak.
Since the jobs data on April 7, gold has come $15 short of rewriting its record high in futures trading and $25 below the all-time high in physical trading.
On April 13, the most-active gold futures contract on New York’s COMEX hit a session peak above $2,063. That compares with the apex of $2,078 reached on August 7, 2020, according to Investing.com’s weekly charts.
Charts by SKCharting.com, with data powered by Invesing.com
Physically-traded gold bullion, meanwhile, got to above $2,048 on April 13, against spot gold’s all-time peak of $2,073 set on August 7, 2020, according to weekly Investing.com data.
Given the momentum in the yellow metal, expectations are for both futures and the spot price to rise to $2,100 or above before any exhaustion in the rally.
Context
The last time gold and the phrase record high appeared next to one another was in the aftermath of the coronavirus outbreak, when buyers piled into the yellow metal as a hedge against the trillions of dollars of government spending on COVID-19.
Many were still staying away from the dollar, U.S. bond yields and the S&P 500 at that time amid uncertainties over the trek of the virus and fears over how much more damage the pandemic could bring to the global economy.
When news of vaccine breakthroughs first made headlines in November 2020, gold began to experience the start of a major correction that brought futures to beneath $1,623 and spot to under $1,615 by September 2022.
But it wasn’t a one-way drop, with safe-haven demand again lifting an ounce to above $2,000 in March last year, nearing record highs at one point, before the bottom fell out of gold once more.
This time though, the sentiment in gold seems to be different.
Increasing bets that cooling inflation will bring a stop soon to the Federal Reserve’s rate hikes has ignited a new fire under the rally.
Over a span of just six weeks from the end of February, some $200, or 5%, has been added to an ounce.
Gold has gained from data such as U.S. wholesale prices, which experienced the largest drop in nearly three years in March that reinforced the notion of inflation receding significantly from four-decade highs.
Even more supportive were U.S. consumer prices, which grew about one percent below February levels during the year to March — despite core prices minus food and energy remaining stubbornly higher.
Taken together, the two pieces of data suggest that the Fed is finally turning the corner from the pandemic-heightened inflation and might soon wind down its regime of interest rate hikes — a process that could significantly weaken the dollar and boost gold, the number one alternative to the U.S. currency.
Said Ed Moya, analyst at online trading platform OANDA:
“This could be the moment for gold (in dollar terms) to make record highs.”
“Gold is a hop, skip and a jump from record territory,” Moya added, noting that a major drop in U.S. retail sales or a disappointing start to Wall Street’s bank earnings were other triggers that could get the safe-haven mode in gold ticking towards an all-time high.
Technically, the gap between futures and spot gold was narrowing too, in another indication of strength, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.
“The spread between futures and spot gold is thinning by the day and stands at around $15 or below now. This is indicative of gold’s general strength and a clear demonstration of how the physical price is converging towards the higher futures price.”
- Sunil Kumar Dixit, chief technical strategist at SKCharting.com.
The Bull Case
In gold futures, the unbroken advance by COMEX front month has been well supported by the 5-Week Exponential Moving Average, or EMA, dynamically positioned at $1,993 and closely supported by the 5-Day EMA at $2,030, said Dixit. He adds:
“As long as prices are held up by these support levels, gold futures are poised for a retest of the all-time high of $2,079.
A break above that peak, assisted by momentum above the $2,100 zone can trigger massive short covering from institutional trading desks for precious metals, taking gold futures towards $2,150 and $2,200 as the first leg of the extended rally.”
The Neutral & Bear Cases
As gold approaches record highs, profit booking among retail traders is likely, pausing the upside fervor and triggering a short-term consolidation towards support areas.
Adds Dixit:
“We may see futures pull back towards the support areas of the 5-Day EMA dynamically positioned at $2,030.”
The consolidation could, in turn, heighten if that 5-Day EMA support does not hold and a revisit to the 5-Week EMA occurs, pushing futures down to $1,993, cautions Dixit. He adds:
“The short term correction towards the Daily Middle Bollinger Band of $1996, which may happen in the event of any profit booking by retail segments, will still not alter the bull trend in gold futures.
The existing spread of $15 or lower on futures versus spot could continue to show occasional contraction, inductive of physical demand.”
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Disclaimer: The content of this article is purely to educate and inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically 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.