Commodities

Fed’s ‘patience’ on rates lifts gold; can it run even higher? – Commodity News

• A- A A+

Gold prices have staged a remarkable rally in recent months, supported by a weakening dollar, growth risks and volatility in the broader market, as well as central banks expanding their reserves. There’s little on the horizon to suggest a change in this upward pattern, though for the bulls to manage to clear the $1355-1365 zone, some new trigger may be needed.

After a relatively rocky year in 2018, which saw gold prices close marginally lower (-1.5%), the yellow metal has started the new year on a high note, gaining around 3% so far in January – with a little help from dovish Fed signals. The US central bank adopted a much more cautious tone lately, indicating to markets not only that any further rate hikes are “on pause” for now, but also that it might halt the reduction of its bond portfolio. The result was a softer dollar, and since gold is denominated in dollars, buying bullion became ‘cheaper’ for investors using foreign currencies – boosting its demand.

Of course, market concerns around the deteriorating health of the global economy and volatility in financial markets probably played their role in propelling gold higher as well, with investors seeking a hedge against worst-case outcomes. Separately, recent reports suggest that central banks around the globe – most notably Russia’s, Turkey’s, and Kazakhstan’s – massively expanded their gold reserves in 2018, in order to diversify their holdings amid growing geopolitical tensions.

So, with gold prices now trading at 8-month highs around $1325, the question on everyone’s mind is whether this uptrend will continue and if so, for how long. Put simply, there’s little on the horizon to suggest gold won’t remain attractive over the near term. Several risks linger, with a synchronized global slowdown and whispers that a recession may be slowly approaching likely to keep demand for defensive assets intact for the time being. Meanwhile, the Fed’s recent U-turn on rate hikes and signals that it will stay on hold for a prolonged period could continue to diminish the dollar’s relative appeal overall, by extent supporting bullion.

The technical picture concurs, with the metal having recently posted a “golden cross”, whereby the 50-day simple moving average crosses above the 200-day one; a bullish sign. Meanwhile, bullion is trading above an uptrend line taken from the lows of November 13, and as long as that is the case, the short-term technical outlook remains positive.

Further gains could see prices eventually challenge the elusive $1355-1365 zone, but for the bulls to manage to pierce above that too in a sustainable manner, they may require some escalation in market concerns and/or a plunge in the dollar. Not least because the precious metal has already gained substantially, which implies that a lot of the “bad news” is likely priced in by now and thus something new may be needed to fuel the next big move higher.

On the flipside, a correction lower in the metal could stall initially near the crossroads of the $1298 support area and the aforementioned uptrend line. A potential break below that zone would shift the near-term technical bias back to neutral, opening the way for a test of the $1276 hurdle, this being the January 24 low.