Usually, the Dollar and GOLD are negatively correlated. This means that the stronger the US-Dollar becomes, the lower Gold prices will be as many more investors will prefer liquid investments. Times of crises and the need to safeguard funds are the major exceptions to this.
Are Conditions Perfect for Gold’s Uptrend?
2022-03-14 • Updated
Before we answer the questing in the headline, it is important to remember that the circumstances were not ideal for gold during 2021. Yes, the uncertainty was there due to the ongoing waves of the pandemic. Also, inflation was starting to boil, despite repeated efforts of central banks to calm it. However, the US dollar was the winner, not gold. The greenback has bounced back after the US Dollar index recorded its lowest level in December. The real yields were trapped within the 0.50% range over the year after having already seen repeated declines for two years.
Apart from inflationary pressures, all other factors were serving as tailwinds to gold after reaching $2000 in August 2020. But inflation along with the slowing global economy are the factors that make gold shining brighter.
How has gold reacted to the Russian-Ukrainian war?
Gold prices rose in recent weeks, as investors turned to safe-haven assets amid rising tensions between Russia and Ukraine. In addition, gold provides a place to hide from out-of-control inflation, and there is no sign that it is going to calm down anytime soon.
The latest CPI data also confirms that the US inflation is still very hot after rising 7.9% year on year. Geopolitical tensions and strong inflation numbers have encouraged some traders to bet on higher gold prices over the next few weeks. Therefore, 2022 gave gold a gift to rise above $2000 for the first time since December 2020.
What are the reasons that support gold prices?
With gold seen as a hedge against inflation, prices still have room to go up. The uncertainty has pushed investors to buy gold. What are the factors that will help gold rise?
- The possibility of disruptions in global supply chains of raw materials since Russia is one of the largest producers of these materials, along with Ukraine.
- Recent inflation data suggests that price pressures are unlikely to calm any time soon.
- The already fragile global economy has taken another hit, and it is hard to imagine a scenario in which continued tensions with Russia do not have real economic impacts.
- Expectations that gold will outperform even after the war ends because of post-war effects.
- The expected decline in global oil and gas supplies due to the sanctions imposed on Russia, resulting in higher oil prices.
- Fed will hike rates, no joke here. But any indication that they will raise it four times this year instead of six as markets have priced in, would be positive news for gold.
- The world will dive into recession as inflation continues to soar, prices for commodities and raw materials are rising, and economies are slowing. Gold will be the preferred asset.
Where will gold prices go?
Gold's recent rally is just the beginning of a bigger move in the long term, even if the sentiment among Wall Street and traders weakens in the near term. After the precious metal rose above $2000, this may be a sign that it needs to calm down a bit. There is no doubt that gold is in an uptrend, but some consolidation is needed. Everything that happens around gold supports its long-term rally.
In the end, the war between Russia and Ukraine caused major movements in commodities. Since the invasion on the 24th of February, the prices of oil, gold, uranium and even soft commodities such as wheat have skyrocketed. Although a diplomatic solution to this conflict is likely, the war will have a genuine effect on the markets for years to come.
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The views here are solely based on Technical Analysis techniques using my personal Smart Money approach. Hence, it is important to understand that the trading of CFDs comes at a risk; if not properly managed, you may lose all of your trading capital. To avoid costly mistakes while you look to trade these opportunities, be sure to do your own due diligence and manage your risk appropriately.
Even though we've only witnessed sluggish movements from the Dollar over the past few weeks, the general idea and bias still seem intact and untampered. The bullish impulse however can be seen as "searching for support".
Suddenly, the US Dollar Index fell 6.70% over the last two weeks, marking the biggest decrease in the currency since 2020.