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Gold Prices See Pressures Building at $1,900, ETF Outflows an Ominous Sign

Gold Prices See Pressures Building at $1,900, ETF Outflows an Ominous Sign

Margaret Yang, CFA, Strategist

GOLD PRICE OUTLOOK:

  • Gold prices pulled back slightly after rising for two days as the DXY US Dollar rebounded
  • Thursday’s US inflation figures will be closely eyed by bullion traders for clues about pricing pressure and the Fed policy outlook
  • The world’s largest gold ETF saw net outflows last week, ceasing a five consecutive weekly inflow

Gold prices retreated slightly during Tuesday’s APAC session after surging 1.5% over the past two days. A stronger US Dollar and steady Treasury yields exerted downward pressure on the precious metal, while traders were holding their breath for US inflation data to be released on Thursday.

US headline rate is expected to hit 4.7% in May, reaching the highest level since 2008 partly due to a low base effect. Yet, a large deviation from the baseline forecast may stoke market volatility, especially for the US Dollar and precious metals. For now, it seems that gold prices are struggling to breach the $1,900 mark – a psychological resistance level.

Gold is widely perceived as a store of value and hedge against inflation, therefore a higher-than-expected CPI reading may be positive for its prices. On the other hand however, an inflation overshoot may reignite fears about the Fed tapering stimulus and exerting downward pressure on the yellow metal. This mixed dynamic renders gold prices vulnerable to heightened volatility during and after the data.

Recent comments from Treasury Secretary Janet Yellen appears to be bolstering the US Dollar and weighing on precious metal prices too. She showed her support for President Joe Biden’s $4 trillion spending plans even if inflation persists into next year. She also added that a “slightly higher” interest rate environment would be a “plus” for the US and the Fed. This strengthened the reflation outlook while echoing several Fed officials’ comments about starting a tapering debate.

US Consumer Price Index YoY - Expectation

Gold Prices See Pressures Building at $1,900, ETF Outflows an Ominous Sign

Source: Bloomberg, DailyFX

The recent ETF flows showed that investors are hesitating to chase up after gold prices surged above $1,900. The world’s largest gold ETF - SPDR Gold Trust (GLD) – saw 1.9 million shares of net redemption last week, pausing a four-week inflow streak. It suggests that more investors are probably looking to take profit as gold prices approached a key chart resistance. Gold prices and the number of outstanding GLD shares have exhibited a strong positive correlation in the past (chart below). Therefore, net outflows from the ETF may signal near-term price weakness.

Gold Price vs. GLD ETF Shares Outstanding – 12 Months

Gold Prices See Pressures Building at $1,900, ETF Outflows an Ominous Sign

Source: Bloomberg, DailyFX

Gold Price Technical Analysis

Technically, gold prices extended higher within an “Ascending Channel” after completing a “Double Bottom” chart pattern. Prices breached above a key resistance level at $ 1,875 (the 50% Fibonacci retracement) and have likely opened the door for further upside potential with an eye on $ 1,922 (the 61.8% Fibonacci retracement). The MACD indicator formed a bearish crossover and trended lower, suggesting that bullish momentum may be fading and a technical pullback may follow on.

Gold PriceDaily Chart

Gold Prices See Pressures Building at $1,900, ETF Outflows an Ominous Sign

--- Written by Margaret Yang, Strategist for DailyFX.com

To contact Margaret, use the Comments section below or @margaretyjy on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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