Gold price analysis: Will it break 1,800 after golden-cross?
15:07, 10 December 2021
Spot gold reacted positively to the latest data on US inflation. The precious metal was up 0.3% Friday to $1,780 an ounce by 15:00 GMT.
US consumer prices surged in November with the Consumer Price Index (CPI) up 6.8% on an annual basis, faster than the 6.2% rise in October, the Bureau of Labor Statistics said in a release. Economists had been expecting November CPI to rise 6.7% on an annual basis.
Pressure of the US Federal Reserve
Quickening inflation puts pressure on the US Federal Reserve more quickly ease back on its asset purchase programme and revisit the timing of future interest rate hikes.
In recent weeks, gold has been restrained by a recovery in market expectations on Fed interest rate hikes in 2022 and prices have been unable to break above the resistance level of $1,792/oz. As of writing, gold prices are c.1% up on the week, but still 2.6% lower from a month ago and 6% down year-to-date.
Fundamentally, US 10-year real rates remain around 1%, as the nominal yield struggled to rise above 1.65-1.70% while the 10-year breakeven remained persistently elevated at 2.5%. If the Fed adopts a more hawkish stance, real rates may rise from here and they could potentially exert a downward pressure on gold prices.
On the daily chart, a "golden cross" – a technical pattern indicating of the commencement of a prospective uptrend – just formed as the 50-day simple moving average (SMA) crossed the 200-day SMA. Gold's psychological barrier of $1,800/oz is critical, and a break above it increases the likelihood of an attack on $1,875 (November highs), while a pullback from resistance might keep gold prices on the sidelines ahead of the Fed meeting next week.
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Symmetrical wedge pattern on Gold weekly chart
Gold 1-week price chart – Credit: Capital.comGold fundamental analysis
Gold prices have historically had a negative correlation with US real yields. Higher real yields represent a deterrent to invest in non-yielding assets like gold, as investors find it more appealing to keep their money in liquid assets, like cash or short-term government securities.
Inflation that is more persistent than expected, along with improvements in labour market conditions, puts pressure on the Fed to normalise monetary policy further, and real interest rates may rise accordingly.
Precious metals drop when the market begins to price in a faster pace of rate hikes by the Fed in response to rising inflationary pressure.
Last week, Fed Chair Jerome Powell testified that it is reasonable to abandon the term "transitory" when referring to inflation, suggesting price rises will likely continue to exceed the target next year.
As of 10 December 2021, US money markets are currently assigning a probability of 58% the Fed starts hiking rates as soon as May 2022, according to the latest CME Fed Watch tool.
Investors are now waiting for the Federal Reserve's December 15 meeting, which will provide further insights on the response function to growing inflationary pressures.
10-year real yields vs gold price (inverted) – Credit: TradingviewGold technical analysis
Despite increasing market expectations on Fed hikes, gold has demonstrated its resilience in recent weeks, remaining above the $1,860/oz support level since 13 October. Earlier this month, the 50-day SMA crossed below the 200-day SMA on the daily chart, forming a so-called "golden cross" – a technical chart pattern indicating the start of a potential uptrend.
The next level of resistance is represented by $1,800/oz, close to the level of the 50-day and 200-day moving averages. A significant breakout at this level would increase the likelihood of an aggressive move toward 1,875 (November highs) and then into 1,920 (May highs). A pullback from 1,800 levels might bring the bears back to target 1,750 region ahead of the Federal Open Market Committee (FMOC) meeting next week.
Gold price analysis 1-day chart – Credit: Tradingview