Gold Price Analysis: XAU/USD driven above $1,800 by falling real yields/stagflaiton fears
- Central banks and stagflation fears are turning gold on a dime.
- Bulls head towards $1,1810 as bulls stay the course.
- A continuation above $1,810 will open risk towards $1,850 for the rest of the year.
Gold, XAU/USD, remains in the hands of the bulls. The central bank synergies in rhetoric and action weigh on real yields in an environment of uncertainty. The risk pertaining to the Covid-19 Omricon variant to global growth and persistent inflation is a perfect storm for the yellow metal. At the time of writing, spot gold is trading at the highs of the day so far and between a range of $1,797.35 and $1,803.34.
The yellow metal is trading above the $1,800 psychological round number for the first time this month following a series of central banks that have, in some cases, surprised on the hawkish side. The various changes to monetary policy and guidance have been justified by the strength of global inflation. However, while there is some optimism in growth accompanying some of these central bank decisions, the risks to a downturn are starkly worrisome which is weighing on real yields.
Gold's stagflation appeal
Gold’s traditional role as a hedge against inflation has faltered all year and has been in the worst decline since 2015. The prospects of central banks reining in stimulus and higher global rates have weighed on the non-yielding precious metal. However, growing risks that the global recovery could stall leave the defensive plays, such as gold, in the limelight and favourable to investors. The precious metal has long been regarded as a hedge against inflation and would be expected to thrive during a bout of stagflation.
The threat of the spread of the covid variant is now stoking concerns about sustained cost pressures and supply chain turmoil which would be expected to lead to the reversal of monetary policy trends. This would likely force a macro rotation out of reflation assets such as copper and into precious safe-haven metals.
Central banks in focus
Federal Reserve Chair Jerome Powell and counterparts at the Bank of England, European Central Bank, and the Bank of Japan had voiced cautious optimism that the supply-chain disruptions will be transitory. However, in the latest commentary, there s more concern than previous related to the new variant. The ECB, for instance, expects a soft patch due to the 4th wave of the virus. Today, we will hear from the BoJ again where no changes are expected, not least, given the increased uncertainty that the omicron variant has cast on the economic outlook.
Meanwhile, noting the US dollar decline and gold's rise, despite the hawkish Fed, analysts at TD Securities said that this highlights the asymmetry present in precious metal markets.
''We continue to see the balance of risks tilted towards the upside for the near-term precious metals outlook as positioning that has skewed mainly to the short side in recent weeks is unwound somewhat.''
Gold technical analysis
The price of gold is shooting higher towards a key level of what would be expected to act as resistance near $1,1810. A continuation above that level would open risk towards $1,850 for the rest of the year.