Gold consolidating above $1850 at tip of ascending triangle

It has broadly been a day of consolidation for spot gold prices (XAU/USD). The yellow metal trades with modest gains of just under $4 on the day or about 0.2% and sits currently sits just to the south of the $1860 mark, having twice rebounded from tests of the $1850 mark to the downside this session.

Consolidation

The market’s broader appetite for risk has been difficult to decipher, with US stocks broadly a little higher, seemingly aided by a fall retracement lower in US bond yields. Yields have moved lower in wake of largely dovish commentary from Fed officials on Tuesday, in which they played down the notion that the bank will be thinking of tapering asset purchases any time soon. Meanwhile, though political commentators are enjoying one of the most tumultuous periods of their careers, markets don’t seem to care too much as to whether or not US President Donald Trump is impeached or not and are much more focused on the incoming Biden administration.

Lower nominal (and real) yields ought to be a positive for gold, which has not substantially picked up yet and still trades below Tuesday’s highs. Perhaps this reflects caution ahead of the unveiling of Joe Biden’s fiscal stimulus plan for when he takes office which will be unveiled on Thursday, as well as ahead of remarks from the Chairman of the Fed Jerome Powell on that very same day.

A larger than expected stimulus package could trigger another shift higher in yields, which could be a gold negative, though if Powell reiterates what other Fed members have been saying about not being overly keen to taper the bank’s asset purchase programme any time soon, this could keep real yields from rising. This would be a bullish outcome for gold, not only because precious metals like low real yields but also as it would lead to higher inflation expectations, signaling higher inflation ahead (a positive for precious metals which are seen as the best hedge against inflation).

US Consumer Price Index numbers for December were a little better than expected but still well below the Fed’s 2% target. But markets seem not to care about backward-looking data right now and are firmly focused on the inflation outlook for 2021, which most analysts see as favourable. Indeed, inflation is expected to rise significantly over the coming months to reflect the recent recovery in energy prices back to pre-pandemic levels, as well as upwards pressure on prices amid a surge in demand as Covid-19 lockdowns are unwound.

Inflation will be a key factor for gold this year; assuming it does rise back to or even above 2% YoY, the more the Fed takes a hands-off approach (i.e. allowing inflation to rise), the better this will be for gold. Conversely, if the Fed is spooked by a faster resurgence in inflation than expected, this could portend tightening and be negative for gold.

XAU/USD consolidating at tip of ascending triangle

Spot gold prices continue their consolidation within what appears to be an ascending triangle that could prove to be a bullish signal. To the upside, resistance in the mid-$1860s is providing a ceiling to this triangle, whilst an uptrend from the Monday and Tuesday lows from this week have been supporting the action. A break above the mid-$1860s could portend a move above XAU/USD’s 50-day moving average (DMA), which resides at $1868.54 and then perhaps on towards the precious metal’s 21DMA which sits just above $1880.

XAU/USD hourly chart