A gold traders playbook - the rise and rise of Gold

We see the triangle break targeting a move to $2060 – we see a pronounced cup and handle (best seen on the weekly), which now complete suggests an increased probability we see new all-time highs.

Price is testing the 1900 round number and sits up 5.6% for the month of February – the best month since May 2021 – what’s more, it’s taken place when US real rates have gained 23bp over the month – historically this would have been a huge headwind for the yellow metal.

Gold (XAUUSD) daily chart

(Source: Tradingview - Past performance is not indicative of future performance.)

Staying on the technical vibe, we see price riding the upper Bollinger Band as the bands widen, and we have the various oscillators telling us what we can see clearly and that is XAUUSD is positively trending. The obvious upside level now that we’ve taken out the 16 Nov swing of 1877 is 1916 – a break of 1916 and 1923 (the 61.8% fibo of the ATH to March 2021) and we can talk about 2050/60.

We are seeing trend-follower capital into the Gold market now, but positioning is still light and there is far more capital still to be deployed if the move really starts to get away. Known ETF holdings of Gold have moved up 2% moving this year after falling 12% since October 2020.

So, what drives gold right now?

1. Gold is one of the default hedges against military conflict in Ukraine – while no one really thinks NATO will step in militarily, most expect some degree of sanctions – these, if implemented, could have asymmetrical and far-reaching impacts on global economics.
2. Gold is a hedge against a policy mistake from the Fed/central banks – while we won’t know if there is a policy mistake that leads the US economy into recession for some time – if at all – it is good to have a percentage of the portfolio in gold in case this does come to fruition.
3. As the US Treasury yield curve flattens and heads to inversion, the need to hedge against an impending economic downturn/recession increases – perhaps not as much as some would think – but to hold gold in a flatter curve is prudent.
4. Gold has a relatively low realised volatility - so if you want a diversifier in the portfolio – both from a correlation and volatility perspective, gold is the place to be.
5. Gold is not an inflation hedge – the 20-day rolling correlation with US 5y expected inflation is -0.18. The days of hedging inflation are behind us, so we need to understand gold’s role in the portfolio.
6. Gold is going up – momentum and trend-following funds are adding length here – buy strong is the call.
7. We see options traders are bullish – 1-week risk reversals (1-week call implied volatility minus put vol) trades at 1.4 and 1month 1.32 – this is the highest bullish skew since January 2021. The market is saying if we are to see a move then the rallies are likely to be more pronounced than the downside over these periods. What’s important is the skew is not extreme yet.

The question on the future is two-fold:

1. How will the Russia and Ukraine situation play out? A move to $2000 possibly requires a more sinister turn to play out. Conversely, if we see a move to a diplomatic agreement then geopolitical hedges could be unwound.
2. Would a 50bp hike from the Fed in the 16 March FOMC meeting be good or bad for Gold? The next NFP print (5 March) and Feb CPI print (11 March) could decide that. However, historically a 50bp hike (when swaps price a 34% chance of 50bp) would be negative for gold as both real and nominal bond yields spike, I question if the market sees this accelerating the need to hedge a policy mistake, with the curve further flattening to inversion. Whilst nothing is certain, could gold rally on a hawkish outcome?

As always in trading, it pays to keep an open mind and you can trade the possibilities with Pepperstone.