When gold rises, usually it is because of a weaker dollar. Although the Dollar Index did pull back a little today, it was still comfortably above the low of 94.60ish it hit earlier this month. Yet, gold not only surged to a fresh high on the year it also reached its best level since November. Since November, yields have been rising across the globe. Thus, gold has been able to ignore this as well.
So, what is going on and can gold hold its breakout?
Well, to me, it looks like gold investors are responding to two factors.
First, there is some level of haven flows supporting the metal as investors sell expensive technology stocks and seek refuge in the metal.
More to the point, gold is finally responding to high levels of inflation around the world. Eurozone CPI reached an all-time high of 5% in December and today we saw the UK consumer inflation surged to 5.4% in December, the fastest pace since 1992. Even hotter, US CPI has reached a 39-year high at 7%, no less. With crude oil climbing towards $90 and UK consumers facing a jump in utility bills that’s due to hit in April, inflation is likely to rise even higher.
Rising levels of inflation are squeezing households and at the same time increase pressure on major central banks to raise interest rates more aggressively. The net result would be decreased economic activity, which is why we have seen certain sectors of the stock market perform so poorly this year.
It remains to be seen whether the latest breakout attempt by gold can be held, but now there are more compelling reasons why the bulls might hold their ground. Key support is now the area between $1828 and $1830, which was previously acting as resistance. Short-term resistance is seen around $1845, but given the big breakout we may see that level break.
