Gold’s weekly update: Fed independence under fire as geopolitical tensions flare up

Gold’s price continued to rise since our last report forming new all-time highs close to $4600 per troy ounce We are also adding a technical analysis of gold’s four hour chart at the end of the report for a rounder view.

US Inflation data out today

The US CPI rates for the month of December are set to be released later on today, with the inflation print set to garner significant attention from market participants. The Core CPI rates for December are anticipated by economists to accelerate from 2.6% to 2.7% which could provide support for the dollar, as the Fed’s apparent path to remain on hold may be bolstered by the inflation data. On the other hand, should the data showcase easing inflationary pressures in the US economy could lead to pressure being mounted on Fed policymakers to resume their rate-cutting path, which could weigh on the dollar whilst aiding gold’s price given their inverse relationship with one another.

Geopolitical tensions in play

On a geopolitical level, the markets have been busy digesting two new events. Firstly, the US’s territorial ambitions on Greenland have resulted in friction between the NATO alliance, with President Trump stating that “But we do need Greenland, absolutely. We need it for defence” and that the US would take it “one way or the other”, which led to Greenland’s response that it “cannot under any circumstances accept”. Greenland given that it is part of Denmark is also part of the alliance and thus the threat of military action by a fellow member could lead to irreparable damage to the alliance’s standing if not also its dissolution. Furthermore, President Trump’s statements in regards to Iran that “The military is looking at it, and we’re looking at some very strong options. We’ll make a determination” has led to widespread speculation that the US could be preparing for military action against Iran or via one of it’s allies in the region. Hence such a possibility could flare up tensions in the region and could result to a full blown war, as was communicated by the speaker of Iran’s Parliament who sated that “Come and see what will happen to American ships and military bases in the region”. Overall the two geopolitical issues may have resulted into safe haven inflow’s into gold given its status and may have thus provided support for the commodity’s price. In our view, given the current US Government’s approach to diplomacy and the President’s ‘non-diplomatic’ comments, we wouldn’t be surprised to see the aforementioned rhetoric continuing which could further aid gold’s price.

Fed independence under threat

The DOJ last Friday served the Federal Reserve with grand jury subpoenas, threatening a criminal indictment related to Fed Chair Powell’s testimony before the Senate Banking Committee last June. The decision by the DOJ has been described as political in nature, with Fed Chair Powell releasing the following statement “This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions—or whether instead monetary policy will be directed by political pressure or intimidation”. Moreover, head central bankers around the globe including ECB Lagarde and BoE Bailey have released a statement of support for Fed Chair Powell. In turn this apparent attempt to force the Fed on a particular monetary policy may greatly erode market confidence in the dollar and could thus aid gold’s price.

Technical analysis

XAU/USD four-hour chart

Support: 4530 (S1), 4450 (S2), 4380 (S3).

Resistance: 4610 (R1), 4695 (R2), 4780 (R3).

Since our last report, gold’s price appears to be moving higher after clearing our resistance now turned to support at our 4530 (S1) line. We opt for a bullish outlook for the precious metal’s price and supporting our case are all three indicators below our chart which tend to imply a bullish market sentiment, in addition to our upwards moving trendline which we have noted on our chart. For our bullish outlook to be maintained, we would require a break above our 4610 (R1) resistance level, which coincides with gold’s ATH figure, with the next possible target for the bulls being our hypothetical 4695 (R2) resistance line. On the other hand, for a sideways bias we would require gold’s price to remain confined between our 4530 (S1) support line and our 4610 (R1) resistance level. Lastly, for a bearish outlook, we would require a clear break below our 4530 (S1) support level, with the next possible target for the bears being our 4450 (S2) support line.