It has been a good week for the gold and silver bulls. Both precious metals have charts that are indicating higher prices. Some people are not surprised by the gains in gold, but I believe it is worth analyzing. And here’s why!
Gold is known as the anti dollar. It has a negative correlation with the US Dollar. When the US Dollar goes up, gold (XAUUSD) goes down, and vice versa. As you can see, the dollar was also ranging, but recently broke out above 99 and is now over 100. Should be putting pressure on gold but nope! Gold and the dollar are both moving up together. More on this below.
The biggest surprise is the chart above. The 10 year yield has been spiking as the market expects the US Federal Reserve to raise interest rates 6-7 times this year and multiple times in 2023. Because gold yields nothing, it performs well in a low interest rate environment. With yields rising like this, many have been expecting gold to tank. With higher yields and a stronger dollar it should be. I want to point out that both gold and bonds are seen as risk off assets. Meaning money runs into these assets when there is fear and uncertainty.
Before we get into the chart of gold, we must ask why gold remains strong even when yields and the dollar are rising? It could be a few things. Perhaps investors are losing confidence. Gold does well in a confidence crisis when people lose confidence in the government, the central bank and the fiat currency. Perhaps investors are holding gold because of fear and uncertainty. There is a potential that the war in Ukraine could expand into a larger war dragging in other countries. Or maybe the markets are not expecting the Federal Reserve to pull off as many rate hikes as they are saying. But I believe the real answer is that markets are expecting the Fed to not win the battle against inflation. That raising interest rates to 3% by 2023 won’t be enough to tame inflation. Essentially, gold is moving up because it remains the inflation trade. Holding it to protect your purchasing power.
It makes sense. On April 12th 2022, it came out that inflation hit 8.5%, the highest since 1981. Some analysts are saying this is the peak. Producer Price Index (PPI) says otherwise. On the morning of April 13th 2022 PPI surged to the biggest gain on record. The producer price index, which measures the prices paid by wholesalers, increased 11.2% from a year ago, the most in a data series going back to November 2010. On a monthly basis, the gauge climbed 1.4%, above the 1.1% Dow Jones estimate and also a record.
I approach the PPI and CPI as a driver in a car. CPI is looking through the rear view mirror. It shows you what has happened in the past. The PPI is looking through the windshield, or looking straight ahead. It tells you what is coming. With PPI at 11.2%, we know the next CPI data print will still be high. Inflation will continue to surge. If producers are paying more what are they going to do? They will pass those costs to the consumer by raising prices so they can make a profit.
Gold has been in a month-long range between $1920 to the downside and $1960 to the upside. Again, consider gold has been holding on well with yields spiking.
On April 12th, gold broke out of this range with a close above $1960. Boom. Breakout. Going forward, $1960 now becomes new support. As long as gold can remain above this support, we are heading higher. Over $2000 and likely to retest $2060-$2070. If that breaks, we print new all time record highs on XAUUSD.
There is still a chance that gold prints a fakeout. If the price reverses and we close back below $1960, depending on the size of the red candle, we could say the bulls have failed to carry on the momentum and the sellers have regained control.
There is one added element that I should mention. Everyone knows that Russia is stockpiling gold. A lot of rumors circulated after Russia dropped the VAT on gold. Some are saying they may start accepting gold as payment for energy and agriculture. Whatever the case, we know Russia and China have been increasing their gold reserves. I bring this up because maybe gold becomes a financial warzone in the future. The Ruble has recovered and is now below levels seen before the Ukraine war.
And before you go, let me end off with a tease:
While gold is appreciating against most currencies, it has already printed record highs on one major currency. Actually, it printed record highs back in February 2022 and continues to print all time record highs day to day. I am talking about Gold vs the Japanese Yen. Next week I will be putting out a piece on why the Bank of Japan is the most important central bank to watch here. For you forex traders, this is important given what is happening on the Yen pairs. I will tell you why the Japanese Yen is tanking and what it means for the global economy.