The Battle for Bullion Part II

Gold trading

Post last week's more robust than expected U.S. jobs data and hawkish BoE and ECB meetings, the U.S. 10-year real yield closed higher overnight at -48bps. For reference in Mid-November 2021, the U.S. 10-year real yield was trading at a deeply negative -117bps.

The move higher in real yields has not translated into a move lower in gold in a continued rebuff to last year's dominant price action.

Partly this is because the retracement in the U.S. dollar index, the DXY, post last week's ECB and BoE meeting, has supported gold. As viewed on the chart below, the price of gold and the DXY are negatively correlated

Also notable on the chart below, gold held its ground above the December $1753 low (blue arrow), despite the rally in the DXY to a fresh high at 97.44 (red arrow) - a classic case of bullish gold Intermarket divergence.

Gold vs DXY 8th of Feb

The latest CFTC positioning data show that Managed Money net length in COMEX gold more than halved last week to three month low of 49,914 contracts net long.

However, this selling may have been offset by demand from longer-term investors, including central banks. Elsewhere the largest bullion-backed ETF, SPDR Gold shares recently recorded its biggest daily inflow in dollar terms since listing in 2004.

These dynamics reiterate our view that gold's primary driver is no longer real yields, as noted in this article here three weeks ago. Instead, the driver of gold is investor accumulation to protect against the debasement of fiat currency/inflation, equity market volatility, and European geopolitical tensions.

Technically the wedge that has contained gold for the past six months is narrowing, which warns a break is coming. Should gold see a sustained break above resistance at $1845/55, it would be a bullish development and expose a move higher towards $1950.

Gold daily chart 8th of Feb

Source Tradingview. The figures stated areas of February 8th 2022. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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