To The Moon

Gold prices rose sharply today on the news that Ukraine fired mortars and grenades into pro-Russian areas. If the two sides open fire, then gold prices are bound to soar. But given its low probability, let's conduct technical analysis on the gold price trend over the past year and the coming direction of gold futures.

After rising to the resistance level of 1880, gold futures began their significant pullback in the past two weeks.

You may wonder if this is a buying opportunity. Can gold future return to its peak of $2,000?

Tumbling Gold and Uncertain Rates

Looking at this graph, the gold price has been up and down in the two years since it fell from its high in August 2020. After the pandemic began, the U.S. market has experienced repeated changes in monetary policy. (from near-zero rates to seven rate hike expectations)

You can make a comparison. Almost every decline in gold from its highs corresponds to a rise in U.S. Treasury futures. Thus, as long as there is uncertainty about the rate hike policy, gold prices are hardly stable.

For a long time, gold prices and U.S. Treasury yields have typically been negatively correlated. This is consistent with economic principles.

When the yields of other investment products rise, the investment value of gold naturally decreases. At the same time, the increasing US Dollar Index also leads to lower gold prices because the return on dollar assets is linked to the value of the dollar.

So over the last year, as expectations of rate hikes were rising, US Treasury yields have gone up. Whenever the market anticipated that rate hikes would accelerate or there would be more rate hikes, the gold price fell sharply.

 The red line demonstrates a resistance level that gold futures have found hard to break through. Over the past year, the resistance level has been repeatedly tested and consolidated. When the gold futures touch the prices on this line, there will be intense selling pressure. But recently, gold suddenly rose above this level. It meant that the market sentiment shifted from bearish to bullish towards gold.

Let’s find out why.

This significant rise in gold is not natural from a technical level, rather it's the result of Ukraine-Russia Tensions.

The geopolitical crisis in Ukraine and Russia has caused a spike in gold prices that should have pulled back after hitting the resistance level. With regard to time, this rally is within the cycle of an impending retracement. So I am not optimistic about the sustainability of this gold rally.

When the situation in Russia and Ukraine eases, the gold price will back to its original level. 

So are the gold futures still bullish?

I am cautiously bullish for 3 reasons.

First, the negative correlation between gold and U.S.Treasury yields has been challenged.

This 1-minute chart showed the trend of gold futures and U.S. Treasury yields on Monday night. It was rumored that the conflict between the two sides would escalate; gold futures suddenly jumped on this news. The yields and gold futures were positively correlated at this conjecture.

In addition, after the market priced in the hawkish policy of rate hikes, gold futures always bottom out and its support level keeps pulling up. This is a very strong technical signal.

It means that gold has fully or overly priced in the current rate hike expectations. So the rise in US Treasury yields can hardly impact gold prices anymore.

Secondly, we should also note that the negative correlation between gold futures and the 10 year real rate has also been challenged.

In fact, it is the real yield of U.S.Treasuries that is really negatively correlated with gold. (The real yield =the nominal yield➖the rate of inflation)

Historically, gold futures tend to rise during periods of rate hikes when its negative correlation with long-term real rates is invalid. That's what's happening right now, with gold showing greater resilience during the recent rise in the US 10 year real rate.So the fact that gold futures and U.S. Treasuries are no longer negatively correlated is likely an indication of an incoming rally.

Finally, stagflation is another bullish factor.

We all know that the US is currently experiencing a poor macroeconomic environment, falling consumer confidence, and slower GDP growth, but the inflation rate has been hitting record highs.

It is a typical signal of stagflation. During this period, gold futures generally enjoy a rally. So will gold go up this time? I very much look forward to it. I'm going to open a long order at a price around 1840 and buy more if it goes up.

What's your view about  gold futures? Bullish or Bearish?

Will you buy more gold futures?

Share your opinions in the comment section.

$Gold - main 2204(GCmain)$