Gold Primed for $1,800 After U.S. Inflation Drop, Crypto Meltdown

It has the look and feel of the many bull traps we’ve seen in gold—where all the stars seem aligned for a meaningful rally, only for them to fizzle before we get there. 

Yet, if gold bugs are right with their gumption—consumer prices at 9-month lows suggest they probably are as the Federal Reserve seems in place to do a smaller rate hike by December—then $1,800 and beyond for an ounce might be on the way.

Ed Moya, analyst at online trading platform OANDA, touched on the same thing in his closing market commentary on Thursday as gold futures reached 11-week highs, breaking the $1,750 an ounce barrier.

“Gold prices are surging as a cool inflation report has made markets confident that the Fed can downshift [its] hiking pace … and possibly be done with tightening after the March FOMC meeting,” Moya said, referring to the Federal Open Market Committee of the central bank. Adding:

“Gold is breaking out here and it could have a steady path towards the $1,800 level if dollar weakness remains.” 

Charts courtesy of SKCharting,com, with data powered by Investing.,com

Gold led commodities on a broad-based rally on Thursday after the US Consumer Price Index expanded by just 7.7% over a 12-month period in October, versus a growth of 7.9% forecast by economists and against the yearly growth of 8.2% to September. Historical data showed it to be the lowest annual reading for inflation since January.

The Dollar Index, which pits the greenback against the euro, yen, pound, Canadian dollar, Swedish kronaand Swiss franc, meanwhile, fell 1.9% to hover below the 108 mark versus last Thursday’s three-week high above 113. 

Investing.com data showed it to be the dollar’s biggest percentage loss in a day since Oct. 27, 2011 when it also fell 1.9%.

But it’s not just the Fed—and tumble in the dollar—that’s providing the wind in the sails for gold.

The contagion in the cryptocurrency market could be another boon now for the yellow metal.

Gold is probably winning at least some of the money that had exited Bitcoin over the past week as the king of the digital currencies tumbled 25% on concerns related to crypto-exchange FTX, said Phillip Streible, chief market strategist at Blue Line Futures in Chicago.

Streible adds:

“There’s no hard data to corroborate fund flows from crypto into gold now but I’d be surprised if that isn’t happening.”

“Normally, it’s the other way round as gold seldom finds love from the crypto crowd. But gold looks relatively safer now than digital currencies and imagine it has gained new respect that could mean higher allocations that may have been meant for crypto.”

Moya also thinks crypto’s troubles are deep enough that investors may be looking for hedge to their losses.

“A dark crypto period was supposed to begin following the FTX debacle, but a cooler-than-expected inflation report gave every risky asset a massive boost. FTX contagion risks remain elevated … investment into cryptocurrencies will likely struggle here as too many key institutional investors and crypto companies have money tied up with the bankruptcy bound exchange.” 

“Until we see which players were impacted by FTX and if we see other exchanges vulnerable to a liquidity crunch, any crypto rebound might be faded.”

But even without the crypto contagion, gold seemed to have the inherent strength to extend its current run higher, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

US gold futures’ benchmark December contract finished Thursday’s trade up $40, or 2.3%, at $1,753.70 per ounce on New York’s COMEX. The session peak of $1,758.20 was the highest since Oct. 27. 

The spot price of bullion, which is more closely followed than futures by some traders, settled at $1,752.26.

Dixit, who watches the spot price, said gold was ripe for a trend change after seven straight months in the red.

“Pent-up accumulation has exploded in gold breaking through previous month's high of $1,730 and now approaching the 50-week Exponential Moving Average of $1,771."

At above the 50-week EMA of $1,771, the next leg higher sits at $1,796-$1,805, Dixit said.

But gold could still lose its upward mojo and turn lower at some point, cautioned Dixit.

“Overbought conditions on the Daily Stochastics may cause profit-booking from the key resistance zone of $1,796-$1,805, triggering correction to the support areas of $1,730 - $1,710 - $1, 693 - $1,680.”

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Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.