Comprehensive analysis of the main factors impacting gold

Carl Capolingua 22/03/2023
Comprehensive analysis of the main factors impacting gold Comprehensive analysis of the main factors impacting gold
Comprehensive analysis of the main factors impacting gold

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Article Highlights: 
  • Major factors impacting the gold price
  • What gold investors need to watch for in upcoming Fed meeting
  • Gold price technical analysis

Always believe in gold!

As Sir David Attenborough would probably suggest, Gold bugs are an usual but fascinating species. Regardless of what's happening in the world of finance, they always believe conditions are ripe for the next big bull run in gold!

This time, Gold Bugs are touting the current banking crisis as the catalyst for gold to shine in 2023. Why? If the banking system is indeed on the verge of collapse, we may well see the money printing presses at global central banks get switched back on – potentially causing the hyperinflation Gold Bugs have so long hoped for. 
Gold vs Interest Rates vs Stocks
gold price analysis versus yields versus stocks

This chart above considers the recent performance of gold versus the yield on the US 2-Year T-Note and also the S&P ASX200. The 2-Year T-Note represents the key short-term interest rate in the USA. This key market rate is the benchmark price of money for short-term investments. It compares with the 10-Year T-bond yield which is the benchmark for longer term investments, and the 30-Year T-bond yield which is the benchmark for US mortgage rates. 

Also worth noting, the US dollar remains the benchmark global reserve currency. In short, it represents safety. US bonds yields are therefore critically important for the price of gold because gold doesn't have a yield. Counting further against gold, you'll generally have to pay someone to store your gold and keep it safe and secure. Basically, if an investor is able to earn more on an alternative safe-haven asset (like a US bond) – that's bad for gold. 

This is clearly demonstrated in the chart above. Note how in periods where 2-yr T-Note yields are rising, the price of gold is steadily falling, and vice versa. Note also how higher interest rates also proved to have a negative impact on stock prices. So, for the last 12-months or so, gold and stock prices have been moving together, and at the same time, both have been moving in the opposite direction to yields.

This conflicts with the traditional notion that gold is a great hedge against the possible economic chaos which is usually the downfall of the stock market. Gold hasn't hedged your stock portfolio, at least not until the recent banking crisis broke following the collaps of Silicon Valley Bank.

It's clear the positive correlation between gold and stocks disintegrates around the time US banks started failing, but at the same time, the inverse relationship between gold and yields continued. This occurred because investors believed the Fed's new lending program aimed at shoring up liquidity for US banks is another form of quantitative easing (QE), just by another name. QE is the Gold Bugs greatest friend, figuratively speaking, it means money printing.

So, we can see how the current uncertainty caused by the banking crisis might be ugly for stock prices, but it's good news for safe-haven assets like gold. Even better, yields also dropped on the expectation the Fed will have to cut rates soon to save the economy, and thus with lower yields, we have a win-win situation for gold.

Going forward, if you want to predict the course of gold prices, you'll need to monitor what happens with yields. Yields are highly influenced by Fed policy. So, if the Fed continues to prioritise its fight against inflation over the health of the US banking system and economy, and continues to hike interest rates, that's likely to be a negative for gold.

Alternatively, should the Fed move down the path of halting interest rate rises, or even better, it cuts rates and prints money to save the US economy, that's going to be very good for gold.
Spot Gold XAUUSD
gold price gold technical analysis gold chart

Let's now look at the gold price. Starting with Gold's short- and long-term trends.

We can see the short-term trend (i.e., the light green ribbon) and long-term trend (i.e., the dark green ribbon) are both pointing up. The long-term trend ribbon was confirmed as an area of dynamic support with a classic double bottom pattern at 1804-1809 on 28 February and 9 March. 

The price action shows higher peaks and higher troughs which is an indicator of building demand and diminishing supply. The candles show an impressive surge of demand-side candles since the 9 March low.

Demand-side candles are those with white bodies and or downward pointing shadows. Demand-side candles demonstrate there is greater demand (i.e., cash) seeking gold (i.e., supply), and at increasingly higher prices. Larger white bodies in the candles, along with longer downward pointing shadows, demonstrates greater motivation from the demand-side.

The US$2,000 level is clearly a key psychological supply point. It's also an historic supply point from 18 April 2022. It's no surprise then the gold price has reacted negatively at that level. The candles on 20 and 21 March show clear supply around US$2,000, and therefore we should expect supply isn't going to be overwhelmed with a single push. It may take some time for the demand-side to work through the US$2,000/oz barrier.

Confirmation supply has been removed will manifest itself as further demand-side candles, most likely occuring around the short-and long-term trend ribbons. In particular, watch for reversals of the current pullback in between US$1920/oz and down to US$1900/oz. Traders may look to add risk in this area with the right candles.

Bias: Long until a close below the 15 Mar low of US$1885.59.

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