Although the Dollar Index may have come off its 16-month highs reached earlier this week, the greenback remains well and truly the King of FX. Today it was exerting pressure even on gold, as well as emerging market currencies – not least the Turkish lira after the CBRT’s
questionable policy response to surging inflation.
Speaking of inflation, this is what is currently the main focal area for the markets, leaving gold investors torn between choosing the metal for hedging against rising price levels or selling in in favour of the racier US dollar. This is partly why gold has struggled to sustain its breakout from last week.
Still, the downside should be limited for as long as inflation concerns remain the main focal point.
Indeed, with a growing number of forecasters predicting price pressure to remain elevated until at least the middle of 2022, this should keep investor interest in precious metals elevated as people seek to hedge against rising price pressures and to preserve their purchasing power, with fiat currencies losing value across the world.
So, even if we see some central bank policy tightening in the months ahead – whether that means a rate hike or two from the Bank of England or further reduction of QE from the US Federal Reserve – it will probably not be enough to unnerve investors in gold too much.
As such, I would expect dip buyers to step in on any short-term weakness in gold. Key short-term support comes in around $1830 area, where previously gold had found strong resistance. I would imagine there will be many willing buyers around that area for as long as yields do not rise significantly.
Source: ThinkMarkets and TradingView.com
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