Gold prices currently trade at a 5-month high of $1290 on the back of fear… fear of US-Russia tension over Syria escalating… fear that the United States may do a preemptive strike on North Korea or North Korea may hit the US first.
The metal remains well bid on account of rising political uncertainty and negative real rates environment. It is no brainer that geopolitical risks could destabilize the financial markets and force Fed to delay interest rate hikes… and delay the process of normalizing interest rates.
The yellow metal looks set to fly high; well above $1300 levels if the geopolitical tensions rise.
Is it a bull trap?
Geopolitical risks are clearly the main factor behind the recent rally in gold. However, one needs to take into account what is happening on the inflation front. The following factors are a risk to gold rally-
Peak inflation
- The great reflation trade was set in motion by the spike in the Chinese PPI in Q3, 2016. Trump’s victory and his promises to embark on the expansionary fiscal policy turned out to be the icing on the cake.
- However, the Chinese PPI seems to have topped out. In fact, the speculation is gathering pace that inflation may have peaked across the advanced world. Furthermore, markets are slowly losing confidence in Trump’s ability to deliver on his promises on the fiscal front.
- This is evident from the pullback in the inflation expectations. The US 10-year breakeven inflation rate topped out on January 30 at 2.07%.
Gold and US 10-yr breakeven rate comparison chart
The above chart clearly shows gold has rallied despite the pullback in the inflation expectations.
Fed’s Balance Sheet normalization
- The chart above shows Gold rose in line with the expansion in the Fed’s balance sheet size.
- The initial rally was in on speculation that a rapid expansion of the Fed’s balance sheet would lead to hyper inflation. However, it only ended up inflating the stock markets; hence gold decoupled from the Fed’s balance sheet size and resumed the downturn in late 2012.
- The metal suffered sharp losses during the Taper tantrum. However, QE hasn’t really ended. The Fed still reinvests the proceeds of its bond holdings.
- Now the central bank is planning to normalize its balance sheet. The first step would be to end reinvestment of the proceeds, followed by a offloading the bond holdings.
- That means the liquidity would be sucked out of the system, which is bearish for gold.
What’s next?
Gold could continue to rally if the geopolitical tension rise… else the fundamentals - falling inflation expectations and downsizing of the Fed’s balance sheet size - suggests the yellow metal is in for a pullback.
Monthly Chart
- The descending trend line (drawn from 2011 high and 2012 high) is still intact. Long-term view would turn bullish if the prices close above the trend line resistance.
- On the downside, breach of the December low of $1123 would signal the continuation of the larger downtrend.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended Content
Editors’ Picks
EUR/USD trades weak below 1.0800 amid Good Friday lull, ahead of US PCE
EUR/USD remains depressed below 1.0800, as traders lack directional impetus amid minimal volatility and thin liquidity on Good Friday. The pair keenly awaits the US PCE inflation data and Fed Chair Powell's speech for fresh hints on next week's price action.
GBP/USD holds steady above 1.2600 as markets stay calm on Good Friday
GBP/USD trades sideways above 1.2600 amid a typical Good Friday trading lull. A broadly firmer US Dollar could keep any upside attempts limited in the pair ahead of the US PCE inflation data and Fed Chair Powell's appearance.
Gold ends Q1 2024 at record highs, what’s next?
Gold is sitting at an all-time high of $2,236, lacking a trading impetus amid holiday-thinned conditions on Good Friday. Most major world markets, including the United States are closed in observance of Holy Friday, leaving volatility around Gold price highly subdued.
Ripple's move above this key level could trigger nearly 50% rally for XRP
Ripple price has overcome a critical resistance level and flipped into a support floor on the weekly time frame. This development happened while XRP tightly consolidated for roughly 250 days.
US core PCE inflation set to ease in February on month as Federal Reserve rate cut bets for June mount
The core Personal Consumption Expenditures Price Index is set to rise 0.3% MoM and 2.8% YoY in February. The revised Summary of Projections showed that policymakers upwardly revised end-2024 core PCE forecast to 2.6% from 2.4%.