Gold Hits Record Highs on Inflation Concerns, Dollar Weakness
Fundamental Forecast for Gold: Bullish
- Oil Looks to Earnings Reports for Direction, Gold to Rise with Inflation Bets
- Oil and Gold to Decline if FOMC Validates Hawkish Policy Turn Bets
Gold saw the largest monthly gain since November 2009 in April, with the precious metal surging to all-time highs this week just above the $1569 mark. Inflationary concerns coupled with the Fed’s commitment to keep rates at historic lows for an ‘extended period’ has traders seeking higher-yielding assets as inflationary hedges. Gold continues to be one of the main beneficiaries of this movement.
Broad based weakness in the dollar continues to see commodity prices advance, with gold and silver making record monthly gains this month. Concerns over the US’ rising deficits coupled with rising energy prices and ultra-loose monetary policies, continue to support the dollar bears, with the greenback suffering across the board. The dollar index fell to a three year low as traders jettisoned the greenback in search of higher-yielding growth-linked assets. Higher energy costs and mounting geo-political unrest in MENA will continue to make gold an appealing investment amid economic uncertainty.
Looking ahead, gold will continue to see buyers so long as interest rate expectations remain stable. And while yields in the US remain subdued on account of the Fed’s $600B bond purchase program, gold should remain supported. Although a rise in rates would not necessarily be bearish for the metal, it could see some pressure on a broader rebalancing of portfolios in the short-term. With the Fed’s pledge to maintain its accommodative monetary policy, traders will continue to chase higher-yielding assets, with support for gold seen climbing.
Topside targets for gold are eyed at the 100% Fibonacci extension taken from the July 28th and Jan 28th troughs at $1580, followed by the $1600 psychological level. The metal will see no significant support until $1535, with subsequent floors seen at $1530, and $1525. It’s worth noting that daily relative strength suggests that prices are overbought here, with RSI holding above the 80 level. A short-term correction on profit taking would see traders adding to long positions. -MB