Why it's not the time to give up on gold

After spiking higher on panic buying in early March, the speed of gold’s retracement has left investors and traders unsure of what comes next.

Gold 5

In the initial instance, the retracement in gold from the $2070 high, along with other commodities, came on hopes of a diplomatic solution to the crisis in Ukraine.

While it was doubtful that Russia would launch a full-scale invasion of a neighbouring country and then agree to a ceasefire less than two weeks later, wars are unpredictable. And the market opted to give President Putin the benefit of the doubt.

The pattern that the reversal lower from off the $2070 high created was described in our Morning Brief on March 10th as a “tweezer/double top that could turn out to be one for the ages.”

It was the catalyst that prompted a move to a short-term neutral bias in gold. It was also the catalyst for dramatic position unwind after the trend following CTA community, built their long gold position to a two year high during the run higher.

After falling to as low as $1895 this week, gold has regained some of its shine over the past 48 hours to be trading back near $1940. 

Conflicting narratives continue to surround the status of peace negotiations between Russia and Ukraine, including a report overnight that a Kremlin spokesperson said news of significant progress in Ukraine peace talks was “wrong”.

According to reports from the U.S. Defence Intelligence Agency, the stalled Russian offensive increases the probability of Putin making more extreme threats and China providing military aid for Putin.

Finally, the realisation that sovereign reserves are easily freezable provides a reason for Central Banks to evaluate how they hold their reserves. Gold held within a country’s borders cannot be sanctioned or frozen.

The points noted above, along with our previous reasons for holding gold, including as a hedge again inflation and equity market volatility, suggest that it’s not yet time to give up on the bullish medium-term view of gold.

However, gold still needs to see a sustained break above the $2075 double high to signal that the next leg higher has commenced. The target for the move would then be $2250, which would complete a five-wave impulsive advance from the November 2016 $1046 low.

gold daily chart 18th Mar

Source Tradingview. The figures stated areas of March 18th, 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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