By Barani Krishnan
Investing.com — An inflection point is defined as a point of a curve at which a change in the direction of curvature occurs. In trading perspective, it’s the point at which your position could go in a way that lets you raise a glass in celebration – or groan at how you’ve dismally misread the market once again.
Gold is at such a point after settling Friday at just under the crucial $1,800 an ounce level, helped by a modest bounce on the day despite a near 2% drop on the week for its biggest weekly decline since November.
Yet, gold showed resilience in its latest session, indicating that it could be running on the steam of U.S. inflation, which was chugging at its fastest pace in 40 years. That not only makes the yellow metal an interesting trade but also one that’s getting harder to read.
“Gold had a bad week, but it could have been much worse when you consider the 10-year Treasury yield went from 1.53% to 1.75%,” Ed Moya, analyst at online trading platform OANDA, said in a post on Friday just before the benchmark yield rate went to January 2020 highs of 1.79%.
While gold labored below the $1,800 level and the 50- and 200-day Simple Moving Averages, “a continued selloff seems less likely”, Moya, said. But he conceded that “if bearishness resumes next week, buyers could emerge at the $1,770 area.”
Monday was a déjà vu of sorts for gold longs who entered the first trading day of 2022 with bloodied noses, taking their hardest knocking in six weeks from US Treasury yields and a dollar spiking on rate hike expectations.
Even so, after plunging about 1.5% or more on the day – their most since the third week of November – gold prices regained the $1,800 territory but only just, with futures closing the New York session at $1,800.10 an ounce while spot settled at $1,800.85.
That led to a mixed messaging in gold: That the crowd believing in the yellow metal as an inflation hedge could try and push it higher in the coming days and weeks even as short sellers look to knock it down further if yields and the dollar continue rising in a rally that could be fatal to gold.
Monday’s action in gold also proved something else: that a massive wall of resistance awaited longs at above $1,830 an ounce.
Gold has tried in vain to crack the $1,830 resistance numerous times since November. It made another attempt on Wednesday, just before the release of the Federal Reserve meeting minutes for December that indicated the first pandemic-era U.S. rate hike might come as early as March. Those Fed minutes have again spelled a boon for yields and the dollar, and gloom for stocks and safe-havens such as gold.
The $1,830 wall could now be a longer-term stay, say chartists plotting gold’s next technical move.
”The prices of $1,829 and $1,832 are both Fibonacci retracements, the latter of which is the 38.2% marker of the 2020-2021 major move,” precious metals senior strategist James Stanley wrote in a blog post that appeared earlier this week on Daily FX.
“This same confluent zone caught highs in gold during July, August and September of last year,” he said.
The bearish flag for gold in 2022 could not be missed given the environment in which the Fed is expected to begin lifting rates at some point this year, Stanley noted, adding: “Timing remains of issue, but the accompaniment of a shorter-term bear flag keeps the look on the short side of the market.”
And that short side could take gold deeper below, to under $1,700, he said.
Stanley added that in 2021, three different tests of the $1,680 zone created a support area that served as a recent floor for the yellow metal. “That horizontal zone came into play in March, April and August, with an assist in August from a longer-term Fibonacci retracement from which a 38.2 plots right at $1,682.”
“Of note, those support bounces appear to be carrying a diminishing marginal impact, which has allowed for a bearish trendline to form. The bearish trendline combined with horizontal support makes for a descending triangle formation, which will often be approached with the aim of bearish breakdowns.”
Gold has traditionally been touted as a hedge against inflation, although that argument was weakened last year as the yellow metal’s prices steadily fell in the face of ramping price pressures in a U.S. economy rebounding aggressively from the coronavirus pandemic. Often, gold fell at the expense of yields and the dollar as both rallied on expectations of rate hikes by the Fed to tamp down inflation.
The Fed has laid out an expedited timetable for ending its pandemic-era stimulus and said it could have as many as three rate hikes in 2022. But those plans will also depend on its ability to keep inflation at 2% a year and unemployment ideally at around the 4% level that it defines as “maximum employment”.
“The Fed is unlikely to have as many rate hikes as it thinks in the coming year and if employment slows again for any reason, hedging in gold could again become a theme,” said Phillip Streible, precious metals strategist for Blue Line Futures in Chicago.
The U.S. jobless rate soared to a record high of 14.8% in April 2020 after the COVID-19 outbreak, but fell back to 3.9% last month – meeting the Fed’s target for maximum employment. But the US Consumer Price Index and the Fed’s preferred inflation gauge – the core Personal Consumption Expenditures Index – both grew at their fastest in 40 years in November.
News of rate hikes are almost always bad for gold, which somewhat reflected this last year as it closed 2021 down 3.6% for its first annual dip in three years and the sharpest slump since 2015.
But some analysts think that if the U.S. inflation theme remains strong through 2022, then gold could rebound, and even retrace 2020’s record highs above $2,100 – which, incidentally, came on the back of concerns about soaring price pressures.
Gold Price Roundup & Technical Outlook
Gold futures’ most active contract on New York’s Comex, February, settled up $8.20, or 0.5%, at $1,797.40.
For the week, it fell 1.7% after Thursday’s slump of almost 2%.
Sunil Kumar Dixit, technical strategist at skcharting.com, said gold’s outlook for the week ahead was full of possibilities on either side of the fence.
“There’s an oversold stochastic on the daily chart and a positive closing on the daily chart as well that can cause some recovery if prices are supported above $1,798,” said Dixit. ”It may test $1,810 as the first target and extend that to $1,825 on consistent buying.”
He noted that gold had tested the previous week’s high of $1,831 and faced brutal rejection, breaking below $1,789 and touching $1,782 before settling down $31 for the week at a 50% Fibonacci retracement measured from May 2021 high of $1,916 to the March 2021 low of $1,678.
“Failure to hold above $1,797 may resume selling to retest the $1,782 low and extend the downside to $1,770-1,768. That would mark a 61.8% Fibonacci level of aforementioned retracement. The $1,770-$1,768 zone is key to a major swing low of $1,753.”
Oil Market Roundup
Crude prices dipped Friday as longs in the market took some profit after a four day run-up, but the week was still a big one for oil bulls enthused by OPEC’s decision to raise output in a market still troubled by the impact of Covid variants on the global economy.
An underwhelming U.S. jobs report for December – with just 199,000 positions being added versus expectations for 450,000 – also weighed on the latest trading session on oil, although the country itself was at the Fed’s definition of maximum employment with a jobless rate just shy of 4%.
“While optimism is high that the Omicron variant’s impact on the crude demand outlook will be short-lived, it is too early to be optimistic that the worst of this wave is over,” said OANDA analyst Moya. “With the US still seeing parts of the country struggling with hospitalizations and Germany considering fresh curbs, and as China continues to resort to harsh lockdowns, the short-term demand outlook still has a handful of headwinds.”
But while that may be the case, global producer alliance OPEC+ was also keeping a tight leash on output despite agreeing to a 400,000-barrel-per-day increase for February – a trend it has kept to since August as demand for crude returns to pre-pandemic levels.
“The oil market remains very tight and that should remain the case for the first half of the year as the growth outlook across the U.S. and Europe remains very strong,” Moya added.
Aside from confidence over OPEC+’s market maneuvers, oil prices were also boosted this week by geopolitical risk over the crisis in Kazakhstan.
Crude Price Roundup & Technical Outlook
West Texas Intermediate, the benchmark for U.S. crude, settled down 56 cents, or 0.7%, on the day at $78.90 per barrel. For the week, WTI rose just over 5%, gaining for a third straight week in a rally that has delivered about 10% in all.
London-traded Brent, the global benchmark for oil, slipped 24 cents, or 0.3%, to settle Friday at $81.75. For the week, Brent rose more than 5%, also rising for a third week in a row in a run-up that has delivered about 10% in all.
Dixit of skcharting.com said WTI could consolidate in sideways action but with a bullish bias after last week’s bullish wave supported by the $74 level that shot to the $80 psychological barrier.
“Trading on the stronger side of $80 can send U.S. crude to the $83 and $85 areas, amid mid-term targets for $89 and $90,” said Dixit. “But the upside momentum may fizzle out if major short term support areas of $75 and $73 fail.”
Disclaimer: Barani Krishnan does not hold a position in the commodities and securities he writes about.