Source: PaxForex Premium Analytics Portal, Fundamental Insight
As the saying goes, you can't have one without the other. A rally in gold is necessarily accompanied by a sell-off in the U.S. dollar and/or bonds. For the price of this precious metal to keep rising, either the dollar or bond yields would need to fall at the very least.
However, this has not always been the case.
Twenty years ago geopolitical catalysts such as the events in Ukraine or the conflict in the Middle East would have been enough to send gold prices soaring without any additional factors. Gold was in demand as a safe haven asset.
Under today's macro conditions, gold can no longer claim such demand in an exclusive way. Case in point: Gold futures jumped $10 to $1800 an ounce in COMEX trading on Tuesday amid rumors that a Russian missile meant for Ukraine mistakenly landed in Poland, killing two people. At first glance, gold might appear to be acting as a hedge in response to an important geopolitical incident.
However, if we look at the dollar chart, we can see that the US currency fell to almost 3-month lows earlier on Tuesday, despite strengthening against the euro on the back of the missile incident, which in itself is bullish for the US currency given the negative implications for Europe and the single currency.
Market participants are increasingly betting that in the near future gold will reach the $1850 boundary due to the upward momentum accumulated for the last time. In that sense, it will also be helpful now to articulate what levels the dollar and treasury yields should be at for that to happen.
The three assets are trading in concert on the assumption that the Federal Reserve (Fed) will raise its key interest rate by 50 basis points (bps) at its December 13 meeting, following four previous hikes of 75 bps. Thus, the course of monetary policy may be adjusted amid a gradual easing of inflationary pressures, as reflected in declining consumer and producer prices.
After falling for seven months, gold is now showing more and more determination to rise, and a rise to $1800 and $1850 seems increasingly likely with the accompanying volatility if the December 2 report on the number of Non-Farm Payrolls in the United States proves stronger than forecast, complicating the Fed's position.
If the Fed eventually raises rates in December by 50 bps, gold prices might go up another $30-50, while another 75 bps hike would likely trigger a correction, with prices falling towards $1750 or even $1730, before finding support to rise. With a 50bp Fed rate hike in December already said to be embedded in quotes, the real dynamics of gold will largely depend on what happens to the dollar and treasuries over the next few weeks.
At the time of writing, the dollar index was trading just below 106.30 after hitting a 3-month low of 105.155 in the previous session.
The yield on the benchmark 10-year U.S. Treasury bond was 3.825 after falling to a six-week low of 3.785 earlier in trading.
December COMEX gold futures traded at $1778 an ounce after rising to a 13-week high of $1784.85 in the previous session.
It is important to remember that gold is now set to rise, and buyers are highly likely to be active again in anticipation of the next rally toward $1850.
As long as the price is above 1725.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 1766.05
- Take Profit 1: 1810.00
- Take Profit 2: 1880.00
Alternative scenario:
If the level of 1725.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 1725.00
- Take Profit 1: 1725.00
- Take Profit 2: 1680.00
