Gold Prices Struggle Even as Markets Convulse Amid Omicron Fears

[MongiIG]

GOLD PRICE OUTLOOK:

• Gold prices seesawed on Omicron variant news as real rates rose
• Testimony from Fed Chair Powell now in focus, may offer support
• Technically, prices are testing the mettle of a three-month uptrend

Gold prices seesawed as illiquid financial markets drained dry by US Thanksgiving holiday closures convulsed on World Health Organization (WHO) reports of a new “of-concern” Covid-19 variant, dubbed Omicron. Bullion initially rallied as bond yields fell and the futures-implied Fed rate-hike path flattened a bit for 2022-23.

Gains would prove to be short-lived however, with a rapid intraday reversal bringing gold nearly all the way to flat by the daily close. Worries about a slowdown in growth in the event of another wave of lockdowns pulled down inflation expectations. In turn, that lifted real interest rates (nominal rates less expected inflation).

This undermined gold’s store-of-value appeal. The metal yields nothing, but a return of 0% seems attractive when compared to a negative one on cash, after accounting for inflation. The rise in real rates cut into that appeal, pulling prices down off the highs as the markets weighed Omicron’s potential implications.

The way forward may hinge on incoming comments from Fed Chair Jerome Powell. He is due to testify before Congress this week and will almost certainly face a grilling on how Omicron or even some future problematic variant might echo in the Fed’s rate-hike plans.

Mr Powell may revert to a familiar script, reiterating the Fed party line that rapid reflation owes mostly to “transitory” factors and hinting that policymakers are not in a hurry. This might be amplified with some mention of two-way risk in the size of the monthly QE taper. Gold may find support against such a backdrop.

GOLD TECHNICAL ANALYSIS – THREE-MONTH UPTREND IN THE BALANCE

Gold prices are idling above support guiding them higher since August. Immediate resistance is capped at 1808.16, with a daily close above that exposing the next barrier at 1834.14. Alternatively, securing a break of 1750.78 might hand sellers the initiative, with support anchored at 1717.89 in view thereafter.

Gold price chart created using TradingView

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Written by Ilya Spivak, Head Strategist, APAC for DailyFX. 29th November 2021.