The gold market is off to a hot start this week with spot prices gaining some $24 and change in mid-day action. Although the market is now at 9-week highs, the yellow metal has not been able to breakout above key resistance in recent weeks. This lack of a breakout could set the stage for more bearish bets on the metal in the weeks ahead and could give the bears momentum.
The reflation trade seems to be picking up steam again. Many commodity markets are at or near multi-year highs in price action that could be considered supportive for precious metals. A weaker dollar, stronger crude oil and declining bond yields are all likely supporting gold today as the bulls look to regain control of the daily chart.
The ongoing concerns over inflation and dollar weakness have led some states to pursue gold and silver as legal tender. A dozen states, in fact, have begun the push to legalize the metals for legal tender recognition and that effort could gain further steam if more states join in. The state of Utah has already begun to operationalize this effort, with more states likely to follow in the months ahead. If the metals do become recognized as legal tender, the markets could stand to gain substantially as demand could rise sharply.
The gold market is likely suffering currently from competition in other asset classes that have momentum on their side. Bitcoin, copper and stocks are all places investors may be looking to put capital to work currently as their prices have maintained a strong upside bias in recent months. Although gold is still a reliable ,long-term store of value and protector of wealth, the lure of upside may keep investors more interested in momentum plays currently. This could keep gold from staging a major breakout, for now anyway, but the metal will likely get its day in the sun at some point.
The CFTC recently reported that hedge funds have increased their bearish bets on gold, as the metal has been unable to break out above the $1800 level. This disappointment may be short-lived, however, as rising inflationary pressures could keep the bulls grinding away and higher metal prices become more likely.
If today’s gains hold, the market may see further buying in the sessions ahead as momentum traders and investors look to jump on board again. Given the metal’s close proximity to $1800, however, it will almost certainly take a breakout above this level on a closing basis to attract further buying in the near-term. Today’s upside has put the bulls back into control of the daily chart, and that is a positive for the bulls looking forward.
Other markets, including copper and palladium, may hold the key to gold’s fortunes. Copper is near record highs, and palladium is also on the rise, having closed atop the $3000 level for the first time. If these and other markets do see a slowdown or reversal, much of that capital could quickly find its way into the gold market. The environment for higher gold is still very much intact and the market may simply spend some time sideways before moving higher.