Fed’s liquidity tsunami supports gold rally

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Spot Gold (Ticker: XAUUSD)
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Gold and to a lesser extend silver continue higher with the yellow metal getting close to a technical level that, if breached, may trigger renewed focus on a return to the August record high above $2000. Spurred on by a friendly macroeconomic environment, the yellow metal now trades up on the year following a 14% rally from the April low.

The chief theme across markets which have boosted risk sentiment is the Fed’s ongoing tsunami of liquidity provisions, a development which potentially could be sending unreliable signals from the Treasury markets where yields, despite the inflation focus, have fallen. Not least the very short end, where banks tend to park their excess cash, have seen demand resulting in a very strong 2-year auction yesterday driving the yield down to just 14 basis point.

Additional support has been provided by continued dollar weakness with the Bloomberg Dollar Index having fallen to within 0.25% of the key support level from where it has bounced on two previous occasions in early 2018 and most recently on January 7 this year. For the gold rally to extend beyond current levels, U.S. economic data needs to continue the recent downward trajectory. While not reducing gold’s supportive inflation pressures, a corrective period of the U.S. data cycle should continue to hold down U.S. Treasury yields while adding downward pressure on the dollar.

Having broken above $1900 the next key level being $1923, the 61.8% retracement of the August to March correction. A break above this level may further increase the technical tailwind and raise renewed focus on the August record high at $2074. To the downside, smaller levels of support can be found at $1890 and $1870 ahead of the 200-day moving average at $1844.