Trade Of The Week: Gold Hunts For Fresh Fundamental Spark

Monday’s trading activity in gold was like watching paint dry…

The precious metal kicked off the new week in a muted fashion as investors digested last Friday’s US jobs report and ongoing geopolitical tensions.

So why is gold the TOTW?

1. This could be a volatile week for the precious metal thanks to heightened geopolitical risks, the FOMC meeting minutes, and speeches by key Fed officials.
2. Price action shows a fierce tug of war between bulls and bears with a potential breakout/down on the horizon.

Gold could be waiting for a fresh fundamental spark to tilt the balance of power in favour of bulls or bears.

Before we take a deep dive into what to expect from the precious metal in the week ahead, it is worth keeping in mind that gold glittered in Q1 by gaining almost 6%. This was its best quarter since mid-2020 as fears over the Ukraine-Russia conflict, soaring inflation, and global growth concerns boosted bullion’s safe-haven appeal.

As we enter the second quarter of 2022, the path ahead could be rocky for gold bugs. Last Friday’s strong jobs report has reinforced market bets over the Fed adopting an aggressive policy stance against high inflation. Such expectations are likely to boost the dollar and Treasury yields at the expense of zero-yielding gold.

Gold offers no yield, making it less attractive for investors to own in an environment of rising Treasury yields.

Taking a quick look at the technical picture, the trend swings in favour of bulls on the weekly charts with weekly support found around $1900 and resistance at $1965. A move above $1965 could re-open the doors back towards the psychological $2000 level and higher.

Fed minutes and speeches in focus

Investors across the globe will direct their attention toward the latest FOMC meeting minutes as well as scheduled speeches from key Fed officials.

The meeting minutes are expected to offer market players fresh insight into how officials view the monetary policy outlook after raising interest rates for the first time since 2018. Investors will also scrutinize the minutes for details on the central bank’s balance sheet reduction which is expected to kick off in May. Should the minutes strike a firmly hawkish tone with policymakers discussing the possibility of a 50-basis point rate hike next month, this could boost the dollar and Treasury yields – ultimately weighing heavily on gold.

There will also be a cavalry of US policymakers, including Fed Governor Lael Brainard scheduled to speak this week. Given how these speeches may influence rate hike expectations, gold could be injected with a fresh dose of volatility over the next few days.

Keep an eye on geopolitical risks

Over the weekend, things got messy on the geopolitical front with Ukraine-Russia tensions escalating following the destruction in Bucha, a town on the outskirts of Ukraine’s capital.

This negative development has dampened hopes of peace talks and prompted not only the European Union but world leaders to discuss new sanctions on Russia.  The heightened levels of uncertainty and potential volatility caused by geopolitical risks could drain sentiment, extending some support to safe-haven gold.

Gold ETFs favour bulls

According to an automated report from Bloomberg, gold ETFs added 176,458 troy ounces of gold to their holdings last Friday - bringing this year’s net purchase to 8.06 million ounces. Since the start of 2022, total gold held by ETF’s are up over 8% - marking the highest level since February 2021.

The inflows could be the result of geopolitical tensions in Eastern Europe, soaring inflation, and concerns over global economic growth. An ETF (Exchange Traded Funds) is an investment instrument that allows retail traders to gain exposure to an existing market or groups of markets. A gold ETF provides investors exposure to gold without owning it physically. Inflows from ETFs are seen as bullish for the underlying asset.

Support, Resistance, Support….

The subtitle says it all.

Gold remains trapped within a $65 range on the daily charts with support at $1900 and resistance at $1965. Prices are trading above the 50, 100, and 200 Simple Moving Average while the MACD trades to the upside. A strong daily close above $1965 could trigger an incline towards $2000, $2020, and $2070.

Should $1900 prove to be unreliable support, gold could decline back towards $1874 and $1850, respectively.

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