Gold's stronger showing so far has been in response to several things, including a “risk off” trade that was triggered Tuesday afternoon, but mainly due a weaker dollar. Indeed, something rather odd happened across the financial markets on Tuesday afternoon. Up until 15:00 GMT it had appeared as if it was “risk on” at the start of the New Year: the UK’s FTSE 100 had broken to a new record high, crude oil prices had surged to multi-year highs and the euro/U.S. dollar (EUR/USD) currency pair had dropped to a new 14-year low.
But at around 15:00 GMT, things started to turn around. It was as if someone pressed the “off” button for risky assets across the board: oil went down first, USD/JPY and U.S. indices followed suit while the dollar also weakened. Perceived-safe haven assets like god and yen jumped. While U.S. indices were able to recoup a big chunk of their losses, crude oil remained weak and gold bid. Obviously with many people still away on holiday, liquidity is limited and so price moves can be exaggerated in these types of market conditions.
So it remains to be seen whether there are more turns and twists to come before clearer trends are established for this first month of the year. But it is worth noting that as well as the first week of a new year this is also a non-farm payrolls week, in which there tends to be lots of false moves. So, I am not jumping into any conclusions yet when it comes to the dollar and by extension gold.
But there is a possibility that the dollar may have topped out, judging by the price action on the Dollar Index, which created a potential false break out pattern above the 2016 high. If this is the case, then it should be very good news for gold, especially since we are heading out of disinflationary period. Indeed, the CPI measure of inflation in the Eurozone jumped in December to 1.1%, its highest level since September 2013. Inflation in the UK is also running hot and expected to rise further due to sterling’s sharp depreciation. Meanwhile, in the United States, Donald Trump’s promised fiscal spending could cause prices to rise further in the world’s largest economy. This coupled with a rising price of oil and still very loose global central bank monetary policy stances means there is a risk that global inflation could overshoot.
From a technical perspective, gold’s recent price action has clearly been bullish, although so far no there hasn’t been a decisive break in market structure of lower lows and lower highs. So it is far too early to tell whether it has bottomed out and if it has how high it could go. But it has now risen above the 21-day exponential moving average, which in itself is not necessarily a buy signal but it goes to show that the sellers may be losing control in the short-term outlook. The moving average is also now pointing higher, although the slower-moving 50- and 200-period averages both intact and still point lower. So, the moving averages tell us objectively that in the short term the trend is bullish but bearish longer term.