Gold Rising Despite Strong USD

Gold prices have proven strangely resilient this week. Despite the surge in oil prices and renewed strength in USD, gold has managed to grind its way higher, avoiding the typical sell off we’ve seen in response to prior phases of Crude/USD strength. Given the re-escalation of the Iran war the moves higher in gold this week are somewhat surprising and suggest that traders are perhaps attaching more focus to the recent drop in US inflation and its implications for the Fed outlook. Over the course of the Iran war to date, gold has fallen sharply, weighed on by a stronger US Dollar and higher oil prices.

Shifting Inflation Expectations

USD emerged as the preferred safe-haven during this period with traders shunning gold for the greenback, largely as a result of the tightening expectations which built up across that period. However, on the back of the almost 1% drop in June CPI, USD has lost its upside momentum and gold looks to have regained some favour as a safe-haven with traders judging the USD/Fed outlook to be more mixed now. With crude prices now soaring once again, however, it could be that we soon revert to the prior dynamic as inflation expectations rise again and so too the expectation of Fed tightening this year, lifting USD again. In this scenario, gold should start to turn lower once again. As such, rebounds from here might prove limited.

Technical Views

Gold

For now, gold prices are holding above the YTD lows, fighting to stay atop the 4,092.60 level. However, there is plenty of trend lien resistance in the area, keeping downside risks alive. If we do break higher, 4,389.24 will be the first hurdle for bulls while 3,898.03 remains the key support to watch.