• Gold reached $1,800 and could be firmer for longer.
  • Markets are concerned about stagflation and gold is seen as a hedge against it. 

Update: Gold oscillated in a narrow trading band, below the $1,800 mark through the Asian session on Friday. Bulls, so far, have struggled to capitalize on this week's strong positive move to near one-month tops and break through the 200/100-day SMA confluence hurdle. The prevalent risk-on mood was seen as a key factor that acted as a headwind for the safe-haven XAU/USD. Apart from this, a modest uptick in the US Treasury bond yields, along with prospects for an early policy tightening by the Fed further collaborated to cap gains for the non-yielding yellow metal.

The downside, however, remains cushioned amid a subdued US dollar price action, which tends to benefit dollar-denominated commodities, including gold. Apart from this, growing market concerns about the return of stagflation turned out to be another factor that extended some support to the precious metal. Investors remain worried that the recent widespread rally in commodity prices will stoke inflation and derail the global economic recovery. The mixed fundamental backdrop makes it prudent to wait for a sustained strength beyond the $1,800 mark before placing fresh bullish bets.

Previous update: The price of gold is flat in the Tokyo open on Friday, trading near $1,796 as the price consolidates its recent rally from out of consolidation near $1,750. The highs of the rally were $1,800 stored the prior European session. 

The US dollar has been sinking of late as markets take profit in heavily long positioning that has been building ever since the markets had started to price in the Federal Reserve's hawkish turn and the prospects of not only tapering but higher interest rates next year.

However, the US dollar reversed course mid-week even after the minutes of the Fed's Sept. 21-22 policy meeting confirmed the intentions to start tapering of stimulus as soon as November. Inflation is regarded as being here to stay for longer at the Fed and that has raised concerns over stagflation for which gold is recognised as a hedge. 

Gold, a hedge against stagflation 

''The market's intense focus on pricing the Fed's exit has ignored rising stagflationary risks brewing on the horizon, with speculators offloading their length onto central banks and physical buyers,'' analysts at TD Securities said. 

''In fact, while stagflation has captured share of mind, with the story-count of stagflation-themed news rising to unprecedented levels, it has yet to translate into additional gold demand. However, as the global energy crisis intensifies, reasons to own the yellow metal are also growing more compelling, particularly as a cold winter could send energy prices astronomically higher, potentially pricing-out industries and fueling price asymmetries in markets.''

Brent monthly chart

''This translates into a fat right tail in gold prices, which informs our long $1850/2000 call spread in gold. Real rates are just starting to sink, reflecting these growing risks,'' the analysts at TD Securities said.

''Further, ongoing purchases from CTA trend followers may catalyze a change in tune from the speculative community which could result in sustained price strength.''

Gold technical analysis

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