The gold market is having a strong upside day as prices have hit the $1900 level before taking a breather. The eight-month high in price is likely due to increasing risk aversion as worries over Russia and Ukraine mount further. Risk tolerance is sharply lower today as a Russian invasion of Ukraine appears to be imminent. President Biden also gave a somber update of the situation earlier today. Russia not only appears to have not removed any troops as was previously thought, but appears to have added several thousand more along the border.
The possibility of a Russian invasion is a major source of global concern. It is unclear how the U.S. and its allies might react to an invasion, but a full-blown ground war does not appear to be out of the question. Such a military conflict could be on a grand scale and could change U.S./Russian dynamics for some time to come. The worry over a Russian conflict comes at a time when markets are already grappling with several other worrisome issues, including inflation and the potential for higher interest rates.
The gold market is seeing benefit from several different angles currently and combined those angles have significant power to move the market. The threat of military conflict, inflation, weaker than expected economic data and a slowing economy are all likely providing gold some lift while weighing on stocks and risk assets. As the hawkish Fed begins to tighten rates next month, the central bank could run the risk of putting the economy back into a recession. It appears that the Fed currently believes inflation to be the greater risk, however, and as such it will act accordingly. Multiple rate hikes coupled with a balance sheet contraction could, however, be too much for markets to bear. As investors flee stocks and risk assets over the next several months, much of that capital could find its way into the gold market as investors seek out alternative asset classes to put capital to work in.
The gold market may face another key upside test in the days ahead. Although the metal has had a good run up today, the real test may be in the $1903-$1923 range. This $20 zone may act as a major upside buffer and resistance zone, and could leave the bulls frustrated and tired. If the market is able to surpass the $1923 area on a closing basis, however, the stage could be set for a rapid and sharp rise higher. Such a move could extend to previous all-time highs or beyond. With little, if any, chart resistance in the way, the bulls could potentially have a field day taking prices higher.
An escalation of Russian/Ukrainian tensions could potentially drive gold through upside resistance in short order. If tensions calm over the next few days, the bulls may elect to take some profits and the market could enter a back and fill mode for a bit. Either way, the bulls are now in firm control of the daily chart and any dips are likely to be aggressively bought.