Gold rallies amid soaring inflation

Gold has broken out to reach its best level since June. The metal has found support from several major sources. These include: (1) heightened geopolitical risks and stock market volatility; (2) falling real yields, and more to the point (3) soaring inflation.

Indeed, the number one source of support for gold is rising price levels around the world as investors seek to protect their purchasing powers from being eroded by depreciating fiat currencies. Inflation has reached multi-decade highs around the world, and a record high in Eurozone. Although soaring inflation has raised concerns about policy tightening from the Fed and other major central banks, this has been offset by the fact real yields haven fallen sharply, boosting the appeal of non-interest-bearing assets like gold. The real yield on the 10-year note is around -5.5%, which has been derived from 2% nominal yield minus 7.5% CPI inflation. This means that real yields will not move into the positive territory with a bit of policy tightening, without a sharp fall in nominal inflation rate.

Meanwhile, gold’s breakout comes despite Tuesday’s sharp drop when there was apparently some de-escalation of geopolitical tensions surrounding the Ukraine situation. That drop suggested gold had been at least partially supported by haven flows. This view has been re-enforced amid fresh concerns about the situation there. Ukraine has said that some Russian-backed forces fired shells at a village in Luhansk region. EU's Von der Leyen has added that: “We hear claims from Russia about pulling back troops from Ukraine's border but we have not seen any sign of de-escalation on the ground,” and that it has been adding even more soldiers to the military build-up.

The precious metal’s breakout from its long consolidation inside the triangle means the bulls have come out on top and those who were waiting to see which direction the metal would head to are now likely to join the buyers.


Source: ThinkMarkets and TradinView.com
 
The sellers are likely to move out of the way as they have lost the battle. What this means is that we might see some sharp gains and already that has been the case. Next up is the psychologically-important $1900 level on the bulls’ radar. Beyond this level, $1920 is the next target, last year’s high.

Support comes in around $1875 area, give or take a few dollars. This area was the previous resistance zone, which has now been broken.