Gold Price’s Breakout Is Looming

The gold price is stuck within familiar ranges, bouncing around between a daily resistance and support channel. However, like a coil, the build-up of energy and maintained force could be about to set off an almighty breakout, one way or the other. The Gold Index, XAU/USD, is trading at $1,934.09, higher by some 0.43% and has travelled between a range of $1,920.62 and $1,937.85.

The gold price has been extremely resilient to the most hawkish Fed in a generation. Instead, gold price is elevated due to protection against the fog of war and could also be associated with the inflationary and recession narratives playing out across asset markets.

Money managers cut their gold long exposure and increased short positioning, as rates along the yield curve continued to move higher. Specs also reacted to the hope that the Russia-Ukraine tensions may ease, lower crude oil prices and moderate inflation expectations.

The combination of somewhat less geopolitical risk and the general view that the Fed is behind the curve, prompted speculation that the US central bank has the runway to aggressively tighten policy, an impression which was supported by statements from Fed officials. Given that March payrolls were strong, the belief that there may be several 50 bps Fed Funds increases in the cards drove crude lower on Friday, which suggests that investors may continue to reduce long exposure in the yellow metal,” the analysts concluded.

This would indicate that the bias is to the downside in absence of an escalation in the Ukraine crisis. As several analysts warn, due to the lack of shorts in the market, leaves gold vulnerable to de-escalation in the war or a change in the market’s focus as the fear of trade subsidies, given that there are no shorts in sight.

Meanwhile, in today’s markets, US equities have dropped while the benchmark US Treasury yields remain bid on due to the narrative surrounding the US central bank. The minutes released yesterday from the Fed’s March meeting underpin the worries of higher prices and reinforce the prospect that the US central bank’s balance sheet reduction is imminent.

St. Louis Fed president James Bullard amplified these risks by saying the Fed remains behind the curve despite increases in mortgage rates and government bond yields. As a consequence, the US dollar is back on the bid and reaching fresh two-year highs as measured by the DXY index. At the time of writing, DXY is trading at 99.770, a touch below the highs of 99.821 from the lows of 99.399. The 25 May 2020 weekly highs are located at 99.975.

Technically; the outlook is consolidation until either a clean break of $1,960 or $1,915 with firm daily closes above or below respectively. If the price is unable to break below $1,900, given the longer-term bullish trajectory, a run into the $2,000s is the more likely outcome of the build-up in this phase of consolidation.