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Gold resurrection/revival under review


MongiIG

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Gold is up over 4% in the first two weeks of 2023 after trading above $1900 for the first time since April 2022 as U.S. inflation in December rose at the slowest rate in more than a year.

 

BG_gold_bar_098098098.jpgSource: Bloomberg

 

 Tony Sycamore | Market Analyst, Australia | Publication date: Friday 13 January 2023 

The CPI breakdown and implications:

  • Headline U.S inflation in December fell -0.1% M/M for a 6.5% Y/Y rate, well below the 9.1% peak of June 2022.
  • Core inflation gained by 0.3% M/M; however, the Y/Y rate still fell from 6% to 5.7%
  • The slowdown in inflation data brings to the market more evidence that U.S. inflation has peaked
  • In response, U.S. yields and the U.S. dollar index, the DXY both fell sharply.

Why are yields and the U.S. dollar important for gold?

Gold generally holds a negative correlation with both US yields and the US dollar.

The chart below shows that when the US dollar index, the DXY (and yields) are moving lower, gold generally does well. The opposite is also true. When the US dollar index, the DXY (and yields) rallies, gold tends to struggle as viewed into the end of October last year.

Gold vs DXY chart

 

gold_1_130123.pngSource: TradingView

So what does this all mean for gold?

The December inflation report provides more evidence that the trend lower in inflation is becoming more entrenched. This sets the stage for the Fed to downshift the pace of rate hikes to 25bp at the February FOMC.

A combination that should continue to weigh on U.S. yields and the U.S dollar, and prove supportive of gold.

What do the charts say?

As viewed on the weekly chart below, gold is now firmly back in the middle of the $2070 - $1675 range that has been in place for almost three years.

Gold weekly chart

 

gold_2_130123.pngSource: TradingView

Aside from being mid-range on the longer time frames, gold is now testing a thick layer of resistance at $1896/1920, which includes the 61.8% fib retracement of the decline from 2070 to $1616 and a cluster of lows and daily highs from last year.

A sustained break above this resistance area is needed to open up a move towards the $1999 high of April last year.

Gold daily chart

 

gold_3_130123.pngSource: TradingView

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