The sharp fall in gold over the past few days has made it vulnerable to short-covering measures. Gold corrected more than 10 percent after testing the $ 2,000 / oz level on April 18 and hit a low of $ 1,785 / oz earlier this week before rebounding to the $ 1,840 / oz level earlier this week.
If we look at US CFTC data, speculators for gold futures have increased their positions by more than 35 percent from the lows of late March.
Gold recovery has been implemented as the US dollar index has come down from its highs. The US dollar index reached a 2002 high earlier this month amid expectations that the US Federal Reserve could buy safe havens and lead other central banks to tighten monetary policy to bring inflation under control.
The US Federal Reserve has maintained its position despite growing challenges in the global economy and sharp sell-offs in equity markets.
To reinforce his unwavering position, US Fed Chairman Jerome Powell said this week that the Fed will continue to raise interest rates until it finds “clear and credible” evidence that inflation is receding.
While the Fed maintained its monetary position – the US dollar index fell under pressure amid some disappointing U.S. economic data, low bond yields, and other central bank dilemmas.
Data from the U.S. Housing, Labor, and Regional Manufacturing Index failed to meet market expectations this week. Central banks around the world are under pressure to work to bring inflation under control.
The European Central Bank’s monetary policy report, released this week, reinforces market expectations that the central bank may raise interest rates soon.
The Swiss National Bank, which has so far maintained support for the ultra-loose monetary policy, has indicated it is ready to act if inflation strengthens further.
Consumer prices rose at the fastest annual rate in 40 years last month, according to UK inflation data released this week. Inflation data has added to market expectations that the Bank of England may continue its monetary tightening cycle.
Gold prices have also risen as market players shift their focus from the US dollar to other safe havens. Over the past few days, we have seen changes in the security of the US dollar from risky assets such as commodities and equities.
With continued economic growth, high inflation, geopolitical risks and continuing challenges in the form of China’s fight to control the spread of the virus, the market’s focus has shifted to other traditional safe havens such as bonds, Japanese yen and Swiss francs.
The resources of this safe haven have also become attractive due to the low cost. The Japanese yen fell to its lowest level since 2002 against the US dollar earlier this month, but has now registered two consecutive weeks of gains.
US 10-year bond yields rose to a 2018 high earlier this month but have declined over the past two weeks. The Swiss franc reached a 3-year high earlier this month but witnessed a sharp rebound to test the 3-week high. Gold also joins the rally across the safe haven and ends higher.
Gold’s rebound has forced ETF investors to re-enter. Gold holdings with the SPDR ETF fell to a March low for nine consecutive sessions before a moderate net flow late last week.
ETF purchases have been extremely price-sensitive over the past few months and we have seen renewed interest this time around as prices have kept close to the original $ 1,800 / oz level.
Gold prices are falling, but the question is whether this rally can continue. Although global growth concerns, inflation concerns and geopolitical tensions support gold, the metal is still closely linked to the US dollar trend.
The US dollar has shown some signs of fatigue and we may see some increased losses as other central banks work to bring inflation under control and stabilize currency movements.
However, a sharp and sustained fall in the US dollar is unlikely unless the Fed softens its outlook on fiscal austerity.