Gold breaks through past resistance

Friday 21 January 2022

In this week's market report:

• Precious metals lift

• RBA may increase rates this year

• Geopolitical tensions rise

• WGC: Gold out preforms first part of the tightening cycle

Dear Investor,

US Dollar Gold Price [XAUUSD]
Daily April 2021 - present

(Click to enlarge)

Gold breaks through past resistance: Gold broke above the past barrier of US$1,830s, touching the low US$1,840s overnight, with Au now up 2.25% since the start of the calendar year.

Driving gold higher this week: Gold was likely pushed higher this week on a combination of three factors:

• US 10yr real rates continue to climb.

• The market looks to be switching into risk off mode as technology stocks and Bitcoin continue to slide.

• Increasing geopolitical tensions between Russia and the US (more below).

Precious metals lift: Platinum and palladium have seen strong rallies in the past two trading sessions, with the three other precious metals starting 2022 strong:

• Silver is up 6.90% to US$24.36.

• Platinum, despite being under pressure from the auto sector, Pt is up 9% for the year to date to US$1,039 per ounce.

• Palladium has seen similar solid gains and is now at US$2,038, up 12.50% in the past three weeks.

Reasons to be Bullish: Gold moving through US$1,830 is a positive technical move that sets up the yellow metal for further potential upside targets in the medium term.

Reasons to be Bearish: Au’s strong climb may be thwarted in the short term by the partial retracement relating to the November-December decline(shown on chart at top).

Australian gold price moves up: Australian dollar gold price sits at AU$2,555 per ounce, 2.25% higher for the year to date. The Aussie dollar has fallen this week, from 72.71 US cents to 71.90 US cents (down 1%).

RBA may increase rates this year

The Reserve Bank of Australia (RBA) has been steadfast in their view that rates will not rise until 2024, resting their case on wage growth as the catalyst to life the cash rate. Westpac’s forecast released this morning suggests the RBA will begin increasing rates in August this year with a 15-basis point lift, followed by 25-basis lift in October.

This shift in forecasting, matches our views. Nick Frappell, Global General Manager of ABC Bullion stated here in 2021 he anticipates the RBA will forced to begin the tightening cycle in 2022.

Geopolitical tensions rise

Further supportive for gold is increasing geopolitical tensions. Overnight President Joe Biden commented that any attack from Russia on the Ukraine could potentially incur a ‘minor’ response from US forces, with the BBC writing:

‘Russia has some 100,000 troops near the border but denies planning an invasion.
‘President Vladimir Putin has made a series of demands to the West, insisting Ukraine should never be allowed to join Nato and that the defensive alliance abandons military activity in eastern Europe.
‘On Wednesday, President Biden told a news conference that Mr Putin would pay a "serious and dear price" for invading Ukraine, but also indicated that it might depend on how Russia went about it.
‘"What you're going to see is that Russia will be held accountable if it invades and it depends on what it does," he said. "It's one thing if it's a minor incursion, and then we end up having to fight about what to do and not do etc."__’

Gold outperforms first part of the tightening cycle

As noted from the World Gold Council:

‘More importantly though, financial market expectations of future monetary policy actions – expressed through bond yields – have historically been a key influence on gold price performance. 
‘Consequently, gold has historically underperformed in the months leading up to a Fed tightening cycle, only to significantly outperform in the months following the first rate hike [chart below].
‘Gold may have partly been aided by the US dollar which exhibited the opposite pattern. Finally, US equities had their strongest performance ahead of a tightening cycle but delivered softer returns thereafter.’*

Source: Bloomberg; ICE Benchmark Administration; World Gold Council

[*Median return of gold, US stocks and US Treasuries over the past four Fed tightening cycles. Median returns based on the past four tightening cycles starting in February 1994, June 1999, June 2004 and December 2015. US dollar performance based on the Fed trade-weighted dollar index prior to 1997 and the DXY index thereafter, due to data availability.]

Inside our office this week…

Silver remained popular with investors this week, Additionally, we’re informed that ABC Bullion ½oz Gold Cast Bars are in extremely high demand.

Until next time,

Shae Russell
Group Communications Manager, 
For ABC Bullion