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Chart Of The Day: Why Isn't Gold Collapsing If Rates Keep Rising?

By Investing.com (Pinchas Cohen/Investing.com)CommoditiesApr 21, 2022 20:34
ph.investing.com/analysis/chart-of-the-day-why-isnt-gold-collapsing-if-rates-keep-rising-110181
Chart Of The Day: Why Isn't Gold Collapsing If Rates Keep Rising?
By Investing.com (Pinchas Cohen/Investing.com)   |  Apr 21, 2022 20:34
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Gold is falling on Thursday, for the first time in April, though for a third straight day this week.

That would seem to make sense given the current financial markets environment: the US dollar, which usually trades inversely to the precious metal, reached a two-year high on the Fed's promise of higher interest rates, sapping investment capital from the yellow metal.

Similarly, elevated Treasury yields are ensuring the Fed will follow through with its hiking promises, which the central bank has signaled could be the fastest tigntening since 2006. That will help siphon away traders from non-yielding metals.

Still, for all the gloomy prospects, gold is less than 5% below its Mar. 8 high, which was 3.6% below its August 2020 record. So why isn't gold collapsing?

Two main themes currently support the precious metal—the Russia-Ukraine war and a lack of faith in the Federal Reserve. Oddly the two things even have something in common.

The Fed has grown increasingly aggressive as the war continues to exacerbate global supply disruptions, originally triggered by COVID lockdowns, persistently spiking the cost of goods and materials and driving up inflation. But some don't believe the US central bank will be able to get out ahead of escalating inflation since they continue to appear to be chasing it. That renders moot rising interest rates related to the dollar and higher Treasury yields.

Separately, Russian President Vladimir Putin has long mocked Western powers for being weak. As such, the more economic pain the West has to endure the more Putin may be willing to suffer the economic and political fallout of mounting sanctions against Russia. He's not about to go hungry even if the geopolitical risk of World War III might be causing jitters globally.

So, if geopolitical risks are accelerating, and gold is considered a classic safe haven asset, why isn't the precious metal in even greater demand? Technicals are signaling that sentiment might be about to take hold.

Gold Daily
Gold Daily

Gold has been trading within a Symmetrical Triangle—illustrating the quintessential market disagreement between supply and demand. Both bulls and bears are equally determined, each gaining ground until they meet in the middle, ultimately moving sideways.

Therefore, it isn't a foregone conclusion that rising rates will pressure the non-yielding metal. Moreover, the assumption is that since the pattern developed in an uptrend, once the tug of war plays out, gold will break to the upside of the pattern, signaling a resumption of the underlying trend.

Trading Strategies

Conservative traders should wait for the upside breakout, followed by a return move that demonstrates support before taking a long position.

Moderate traders would also wait for the pattern's completion and the next corrective dip, but for a better entry, if not for confirmation.

Aggressive traders could buy at the bottom of the triangle or upon the breakout, depending on their trading style. Naturally, they can also do both.

Here is an example to showcase the essential points of a sound trade plan:

Trade Sample #1 – Aggressive Long Position Off Pattern Bottom

  • Entry: $1,930
  • Stop-Loss: $1,925
  • Risk: $5
  • Target: $1,980
  • Reward: $50
  • Risk-Reward Ratio: 1:10

Trade Sample #2 – Aggressive Long Position Upon Upside Breakout

  • Entry: $2,004
  • Stop-Loss: $1,999
  • Risk: $5
  • Target: $2,054
  • Reward: $50
  • Risk-Reward Ratio: 1:10
Chart Of The Day: Why Isn't Gold Collapsing If Rates Keep Rising?
 

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Chart Of The Day: Why Isn't Gold Collapsing If Rates Keep Rising?

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