Following the release of surprisingly strong US retail sales and a better-than-expected Philly Fed manufacturing index print, the US dollar and bond yields both jumped, causing gold to crater. The Precious metal broke $1780 support and that triggered technical selling as sell stops resting below were tripped.
Gold’s recent weakness is undoubtedly because of some concerns that central banks might have to start their policy normalisation processes faster than expected, because of concerns over runaway inflation. The Fed turning a bit hawkish has certainly helped to support the dollar against weaker currencies, as well as the zero-yielding precious metal.
But could the precious metal find some unexpected support here?
There are at least two reasons why gold may be able to regain its poise:
- First, if equities drop viciously on concerns about stagflation. A potential correction in the stock market may trigger haven flows into gold, especially as prices have become cheaper while risks to the economic outlook have increased.
- Second, investors might decide to buy gold to hedge against inflation. Undoubtedly, there is some level of inflation-hedging already going, but because bond yields are so low, the fear is that fixed income might provide better value if yields start to climb higher amid concerns about policy tightening. Even so, gold should find at least some tailwind support from this source.
Given the above considerations, I doubt the selling will continue for too long. But before trying to pick the dip, we must see a technical reversal pattern first.
Source: ThinkMarkets and TradingView.com
At the time of writing, the metal was near its session lows, testing the next key support area between $1738 to $1750 – the upper end of this range is where gold had previously found support and resistance from while the lower marks the 61.8% Fibonacci retracement level. Could we see it stage a recovery here?
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