Price Action Suggests June Gold Buyers May Have Found Value

Gold futures closed higher on Wednesday on worries over surging inflation following another sharp rise in crude oil prices. The market also remained bid by the intensifying fighting between Ukrainian and Russian forces. A surprise drop in U.S. Treasury yields also helped to drive out weak shorts late in the session.

On Wednesday, June Comex gold futures settled at $1949.40, up $22.70 or +1.18%. The SPDR Gold Shares ETF (GLD) closed at $181.71, up $2.35 or +1.31%.

Professionals Buying Value Now That Weak Retail Buyers Have Been Wiped Out

Now that the “war premium” has been wiped out, professionals have been looking to re-enter on the long side but only at their price. In other words, professional traders like to buy value, while amateur speculators chase the headlines under the guidance of their brokers.

When gold prices were lower than they are now, professionals were accumulating. They then took profits while speculators were driving prices higher chasing the headlines. When the buying dried up, the headline chasers were left holding the bag while over $180 worth of gains were wiped out in six sessions.

Now that the market has settled inside a major 50% to 61.8% retracement zone, professionals may have found value again. Furthermore, prices hardly moved this week before today’s rally even though Federal Reserve Chairman delivered a hawkish outlook for interest rates and Treasury yields hit multi-year highs.

Powell Admits Fed Has Inflation Problem

Powell’s rhetoric sounded hawkish, but if you look at it another way, it may have been a huge warning that inflation is or about to get out of control. The fact that gold rose the same day that crude oil spiked higher could be an early sign that both of these markets are now correlated.

Although Powell and other policymakers still think consumer inflation could fall back to 2.0% rather quickly because of its planned six or more rate hikes this year, the Fed chief indicated earlier in the week that plan could change.

The central bank will face pressure to act more aggressively if inflation continues its wild surge in response to the Russia-Ukraine war – especially if the violence pushes the price of oil and gas even higher.

“In normal times, when employment and inflation are close to our objectives, monetary policy would look through a brief burst of inflation associated with commodity price shocks,” Powell said. “However, the risk is rising that an extended period of high inflation could push longer-term expectations uncomfortably higher, which underscores the need for the committee to move expeditiously as I have described.”

Short-Term Outlook

Let’s keep it simple.  High inflation, rising crude oil and the on-going war in Ukraine are bullish factors propping up prices. Technically, we’re looking for the uptrend to resume on a sustained move over $1958.70.

If two or more of the bullish factors disappear then prices are likely to retreat. A sustained move through $1897.70 will be a major sign of weakness.