What’s driving today’s $180 rally in gold prices to $4257 — the highest six weeks?
I wish there was an easy answer.
Firstly, gold has been forming a base for the past five weeks, bouncing around near $4000. It briefly dipped below several times but was able to keep from breaking down. The signal from the time spent there and the price action was that the bears were running out of reasons to sell. There has been a huge wave of profit taking since $5400 in March but some strong hands finally appeared near $4000. I’ve written about that before and speculated that Chinese official buying might be taking place near $4000.
In any case, gold has been slowly finding a bottom there and testing it. If you look closely, there has been a series of higher highs since the low on June 30 in another positive sign.
All that sets the stage for a bounce but why today?
That’s far from clear. Zooming in, the buying started in Asia and that might be a hint. Gold bulls have been looking for signs of Asian demand as it’s that part of the world that largely fuelled the prior rally.
From there, a short squeeze might have kicked off to do the rest of the work. Gold ran though some technical levels to maintain the momentum.
Behind the scenes, there have also been positive developments, though not exactly today. The US has been actively devaluing its currency versus the Japanese yen in the strongest sign yet that Trump’s Treasury department wants to pursue a weak dollar policy.
In addition, we got another TACO from Trump this week on Hormuz. Gold topped at the start of the war and has been struggling since because of fears that emerging oil importers would be forced to sell gold reserves to pay for oil (or use it to stabilize their currencies). With WTI falling back to $75 and Trump showing no appetite for escalation, the broader market is signalling a true end to the war (whether that’s wise or not is a question for another day).
Finally, it appears that bullish sentiment on gold was simply washed out. In a situation like that, it doesn’t take much to swing momentum and with broader markets in a ‘buy everything’ mode since late last week, gold has been swept up in the enthusiasm.
What next? The rally is obviously stretched in the short term but we have seen what momentum and FOMO can do in the gold market. The 38.2% retracement of the Jan-June fall is at $4590 and that’s a reasonable target over the next two months.
This article was written by Adam Button at investinglive.com.