GOLD, XAU/USD, US DOLLAR, TIPS, US YIELDS – Talking Points
- Gold has been moving up as the US Dollar came under pressure
- Treasury yields and equity earnings provide enticing alternatives
- Central bank policy more potent than inflation, but will gold glisten?
Gold has been trying to move higher as the US Dollar weakens. With US yields starting to rise, debt becomes a more attractive asset to own.
Some argue that bullion is a good inflation hedge. The last 12 months appear to have undermined that theory. Gold is not far from where it was a year ago and yet we are seeing inflation at levels we have not seen for several decades. Perhaps equities would be a more appropriate hedge for inflation risk, or better still a Treasury Inflation Protected Security (TIPS).
However, the impact of inflation on the price of gold might be through transmission rather than directly. A problem could be that central banks are not responding to inflation the way that they have in past.
Central banks around the world have an asymmetric bias in monetary policy settings. Understandably, they would much prefer to risk high inflation rather than snuff out economic growth.
Former Federal Reserve Chairman, Paul Volker, wrote the playbook on how to get rid of high inflation should it emerge. It is a painful exercise, but it is achievable. Sustained low or negative growth is very difficult to re-ignite once the confidence flame is out.
Current central bank monetary policy settings are very loose, even with some banks tightening. Consequently, equity earnings remain robust. As an asset, gold might be trapped between equities and increasingly attractive bond yields versus a weakening US Dollar. This may help to explain the wide range it has traded in since June.
GOLD TECHNICAL ANALYSIS
The wide range of 1721.71 – 1834.14 might provide support and resistance respectively. Within the range, an ascending trend channel is emerging.
The price has held above the 21-day simple moving average for a week and could signal short term bullishness. The 260-day SMA at 1810.94 may offer resistance. A move above that level might see further bullish momentum evolve.
— Written by Daniel McCarthy, Strategist for DailyFX.com
To contact Daniel, use the comments section below or @DanMcCathyFX on Twitter
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