Quo vadis gold? Short-term analysis of the metals market

Metals nowadays have an interesting environment for patterns. High inflation and potentially large printing of money have “diluted” and will certainly continue to dilute the cash market. The first, bolder voices of currency analysts regarding forecasts for the USD for the near future are already appearing. The zloty begins to have a real room for strong appreciation, as some point to even 3,30. However, we will not analyze the potential to achieve this level today. We will focus on gold. However, I have provided the information about the PLN on purpose to emphasize that the global currency market community sees the potential for a broad depreciation of the US dollar. There are many grounds for it, and although some "solid" arguments with the scenario of further increases saturate the market comments, there are also voices of reason. A few months earlier I indicated a large, practically 20% overvaluation of the USD against the EUR, even in terms of the relative strength index (PPP) without analyzing the fundamental premises. Worse situation on the dollar, high inflation and good chances of further printing of money shape really good prospects for the gold market. I want to briefly present this potential in the analysis below. 

The weaker dollar, more expensive gold

We have known the correlation between gold and dollar for a long time. Despite the fact that both financial instruments - USD and GOLD belong to the so-called safe havens, they are bought in a slightly different way. Generalizing and facilitating this analysis, it can be generally said that gold has its proverbial 5 minutes in the period of high destabilization of the cash market. I mean a situation where there is excess liquidity and excessive overprinting. This is exactly the situation we are currently dealing with in the US. The parameter of cash circulation in the economy is of great importance in shaping inflation. Currently, money is not moving as fast as the Federal Reserve would like. There is a lot of dollar in the market and any explanation of this excess as maintaining a high level of liquidity in the world's reserve currency is no longer sufficient. Gold was quietly gaining at this time and accumulating demand.

Above we have a futures chart on a gold chart. The commercial hedger exposure is quite high, however, the H1 interval is shown above. The USD index has plunged solidly recently, which has gained the royal metal. From a monthly perspective, the involvement of large traders and commercial companies is balancing close to 0. Usually, the transition between the two parties involved in trading on these contracts “heralds a reversal of the trend, or (in the case of strong supply and demand movements) its continuation. Below is the same dollar index futures chart from a monthly perspective. 

Geopolitics does not save USD

Currently, the fundamental situation with vaccinations has not particularly affected the dollar market. On the contrary, it was perceived in a very neutral way. As a reminder, the UK is the closest to the implementation of vaccinations, which has announced their implementation in the near future (about a week). The vaccine does not mean the end of the pandemic, however. On the contrary, it is only the beginning of the fight against the pandemic. 

The situation with the US fiscal package is still unclear. Even if a realistic plan of financial support for the economy is created by the end of the year, it is known that a repeat of this year's scenario is quite realistic. The first voices in Congress are being heard, approving (although the size is still unknown) more and more willingly to implement a new injection of cash to enterprises. For the equity markets this is a very favorable situation, for the dollar, less so, of course.

Gold technically

Looking at the gold market in the long term, it has quite good foundations not only to stabilize the quotation around $ 1 per ounce. Real, negative interest rates should support its price appreciation. It does not seem to be happening yet FED he was to consider an interest rate hike soon. We mentioned about it in this article. The situation on ETFs gold is a little different. They are starting to get rid of this metal slightly. Nevertheless, in my opinion it is only a short-term supply. 

Gold chart, interval D1. Source: xNUMX XTB.

From the perspective of the D1 interval, the support located around the 1768,20 price has been intensively protected. We have not had a major test of this region so far, which proves the high demand for GOLD at this price.

Gold chart, H4 interval. Source: xNUMX XTB.

Going down to the 4-hour interval, we see two interesting zones in which consolidation and breakout may occur. The red zone on the chart is the place between the last confirmed low (in a downtrend)  and the last confirmed peak (in the emerging uptrend). Descending closer to this zone and consolidating around "low support" (1829,93), may encourage the bull side of the market to buy gold. Breaking it over the border  1864,63 is quite real. From a purely technical point of view, this point is a solid drag. There, we would even look for a bigger test and stabilize the price.