Gold, Silver, Inflation Expectations, Yields, XAU/XAG Ratio, Technical Outlook – Talking Points
- Gold prices climbed above a key level of resistance overnight, giving bulls a big win
- Silver outperformed and may continue to do so when looking at the XAU/XAG ratio
- XAU may pullback slightly before the next push higher, with the November high eyed
Gold prices rallied overnight to the highest level traded at since November 2021 after a pullback in yields provided cover for bulls to mount an attack. The yellow metal has held up fairly well in recent weeks relative to stocks and other high-beta assets. The hawkish shift in the outlook on interest rates has caused a fundamental repricing through most asset classes. The main underlying driver of that repricing has been the steep rise in Treasury yields. Those higher yields serve as a headwind to most asset classes, particularly non-interest-bearing instruments.
However, bullion prices have been underpinned by firm inflation expectations, and more recently, geopolitical tensions. The Covid Omicron wave has renewed expectations that inflation may linger for longer than previously thought, with the highly-contagious strain disrupting supply chains due to worker shortages and government-imposed restrictions. Those fears may subside as case figures ebb, but prices are likely to remain elevated through at least the first half of this year. Fundamentally speaking, that should help keep gold afloat in the interim.
Meanwhile, geopolitical tensions are front and center as Russia’s troop buildup along the Ukrainian border spurs worries about a potential invasion. President Joe Biden, in a press conference, said Russia “will move in” when asked about the potential outcome. The reaction so far from the United States and NATO allies appears to be aimed towards an economic sanctions and supplying equipment and arms rather than a direct military confrontation.
Overall, the current macroeconomic backdrop looks supportive of gold prices. That backdrop is also a boon for silver, however. Silver prices have far outpaced gold prices this week, and that trend is likely to continue when looking at the gold/silver ratio. Currently, the ratio stands at about 76:1, which indicates silver is much cheaper than gold, making it relatively attractive to investors.
Chart created with TradingView
Gold Technical Outlook
XAU broke above a key level of resistance overnight before upward momentum cooled in the Asia-Pacific session. Bulls may ease off the gas here and take some profits. If so, a pullback to the just-breached resistance level may act as support and give bulls a “staging ground” for their next push higher. The November high at 1877.15 is a likely target. However, if a deeper pullback occurs, a move down to the rising 200-day Simple Moving Average (SMA) may be on the cards.
Gold Daily Chart
Chart created with TradingView
— Written by Thomas Westwater, Analyst for DailyFX.com
To contact Thomas, use the comments section below or @FxWestwater on Twitter