I hope you had a good week!
With earnings season winding down, the main focus for investors has turned to inflation, and interest rate. The repricing of bond yields in response to this has implications for each of the major asset classes, and indeed rotations within the equity market itself. Today I thought I would continue to highlight the setup in gold that we have been tracking this month.
Whilst the prospect of higher interest rates would generally weigh on the precious metal, there is more than enough inflation to offset this on a ‘real’ basis. Crucially, the Federal Reserve and other key Central Banks appear to be allowing inflation to ‘run hot’ before beginning to move with rate hikes. In other words, real interest rates (which are net of inflation) may fall have further to fall despite being at a negative level already.
Adding to this belief is the shift in narrative between policy makers, who until recently were adamant that inflation was merely ‘transitory’ rather than a posing material threat to consumers and the economy longer-term. In recent weeks it seems as though the language has shifted towards framing inflation as more persistent, capitulating on the ‘transitory’ label used for the past year or so. This week’s US CPI print of 6.2% is the highest since the early 1990’s and seems to suggest that it could pose a bigger problem than first realised.
Having set the scene with the current narrative, we should turn to our framework for analysing markets. I mentioned at the beginning of the month that gold was one of the Checklists that had caught my eye. After the score flipped positive in October, I expected to see continued interest in the world’s best-known inflation hedge. Whilst the bias remained positive the weakening to 0.5 surprised me given the inflation narrative.
The price action so far this month has seen a rise in the precious metal, with a notable surge from an hourly oversold RSI level on two occasions (at the time of writing, we are close to seeing a third setup with the market consolidating around 1850). Whilst the gains have been impressive considering the relatively low positive score of 0.5, it suggests to me that perhaps there is still a lot of competition between the spectre of higher inflation and resulting rate hikes (i.e. little net change in real rates), and that we should not overstay our welcome.
Of course, the market will do what it wants regardless of my opinion and may well continue to climb higher, but my process tempers any ‘FOMO’ in seeing that score of 0.5. I am still inclined to buy the market on short-term oversold conditions, but I’m not yet convinced of the rally (despite the narrative) and wont be until and unless we see a strengthening in the score next month.
In the meantime, zooming out a little to a daily timeframe highlights how gold has yet to breakout and for the time being looks to be contained within a $200 range between 1715 – 1915 roughly.
As long as the score remains at 0.5, my ideal setup would be to accumulate towards 1715, and take profit towards 1915 pending a strengthening in our Checklist score with confirmation from a technical breakout beyond this range.
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Have a great weekend,
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