Gold hits $1900. What’s next?

A sinking dollar, real yields in deeply negative territory and Fed officials singing from the same sheet are all creating an attractive environment for gold bugs.

Fed’s chorus of patience

The latest surge in the yellow metal comes in response to the series of Fed speakers this week who have been talking down the prospect of an extended period of inflation which means the central bank can be patient in adjusting its super accommodative policy. Governor Brainard kicked off the continued dovish take on rising prices by saying that she still did not see longer term inflation expectations rising substantially and the Fed had tools to affect those if they did.

Similarly, Atlanta Fed President Bostic stated that higher price levels do not seem to be “enduring”. More recently, vice chair Clarida continued the coordinated inflation pushback though he did mention that the tapering of asset purchases may happen “in upcoming meetings”.

Of course, gold trades on the interplay between inflation and interest rates and yields have been subdued at best lately, with rates effectively staying lower for longer at present. We’ve also seen a drop in inflation protected US 10-year government bonds this week further boosting gold and fueling the strong break to the upside.

A softer dollar helps the bugs

While Fed officials push back on inflation concerns, so the dollar, which is a key driver for gold. The buck has suffered as low yields and the steady global recovery make non-dollar investments attractive for investors seeking to diversify away from the greenback for better returns. The widely watched dollar index is now approaching the year-to-date lows seen in early January, as Wall Street analysts breathe a sigh of relief that their 2021 predictions of a weaker dollar start to become a reality.

Positive on the year

If the psychological $1900 level is taken out, bulls will aim for the major retracement level (61.8%) of the August to March correction at $1922.70 ahead of this year’s high around $1959. Support sits at the 50% retracement level at $1875.72 with the 200-day moving average below here just above $1840.

The downward trendline from the August highs is key with bulls keen to consolidate above here in order to push for more upside. The daily RSI is overbought and approaching 80 so some consolidation should be expected in the near term, especially if the dollar finds some buyers.

Written on 27/05/2021 07:00 GMT by Han Tan, Market Analyst at FXTM

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