Gold dropped on Friday, as traders continue to see a lot of questions about war, inflation, and central bank hoarding of the metal.
Gold
Gold gapped lower to kick off the session on Friday and has since seen quite a bit of annoying behavior. The gold futures market has been in a “tug of war” phase balancing the safe haven demand against a surging US dollar and persistent inflation.
Because of this, gold continues to be a market that I think is very difficult to get your hands on, but there are a few levels that people will be watching closely. One of the biggest concerns is geopolitical risk. Geopolitical risk typically will add a little bit of a floor in the gold market, and the fact that we are near a large round psychologically significant figure and therefore technical indicators and technical traders both point to some stability here.
Geopolitical Risks and Technical Floors
There is also a situation where oil is pushing higher, and this spikes inflation fears. This is a little bit of a double-edged sword for gold because gold serves as an inflation hedge, but it also forces the Federal Reserve to keep interest rates higher for longer, which is an increase of the opportunity cost of holding non-yielding gold.
The US dollar being strong is working against gold as well as we were testing the 100 level in the US dollar index. Because gold is priced in dollars, a higher US dollar makes gold more expensive for global buyers, acting as a little bit of a souring of the rally.
When I look at the charts, the $5,000 level is obviously a very important level and then again, we have the 50-day EMA sitting just below there. We have significant resistance at the $5,500 level, so I don’t think it goes screaming through there without some type of major shift in the overall attitude around the world. $5,200 has met with some selling pressure over the last couple of weeks, so that might be your short-term ceiling. If we were to break down below the 50-day EMA, we could drop to the $4,600 level: for me, that’s your floor in the market longer term.