Gold futures rose on Thursday ahead of the year-end holidays, buoyed by a slightly weaker U.S. Dollar, but likely capped by firm Treasury yields and strong demand for global equities. The price action suggests the moves were fueled by year-end portfolio balancing rather than bullish positioning by major investors. Especially since volume was well-below average with many of the institutions and hedge funds sitting on the sidelines ahead of the long Christmas holiday.
On Thursday, February Comex gold settled at $1811.70, up $9.50 or +0.53%. Additionally, the SPDR Gold Shares ETF (GLD) finished at $168.98, up $0.39 or +0.23%.
Strong U.S. economic data may have contributed to the price rise with textbook traders reacting to stronger-than-expected inflation data for November even though the U.S. Federal Reserve pledged a faster tapering of stimulus and at least three rate hikes in 2022 a little over a week ago.
‘Omicron On’, Omicron Off’
So what is it? Is gold being supported because the rapidly spreading Omicron coronavirus variant is expected to weaken the economy? Or because easing fears over a fallout from Omicron is weakening the safe-haven appeal of the U.S. Dollar and driving up foreign demand for dollar-denominated gold?
Those gold buyers betting that a weaker economic recovery will mean a slower pace of Federal Reserve rate hikes in 2022 could be right. But then yields probably would have moved flat to lower if there were any doubts.
Those buyers taking advantage of a weaker U.S. Dollar due to safe-haven long liquidation are probably on the right path.
The point is the fundamentals are mixed at this time because investors are being forced to react to Omicron. Prior to Omicron they had a simple plan: Faster tapering, leads to quicker rate hikes. Rising rates helps boost the investment appeal of the U.S. Dollar, and a stronger dollar tends to weigh on demand for dollar-denominated gold.
However, the Omicron breakout encouraged investors to move into the U.S. Dollar too. But that was a week ago. Conditions have changed and now investors expect Omicron to be transitory. So they are lightening up their protective hedges in the greenback.
Essentially this means the impact on the economy probably won’t be enough to slow down the Fed’s tapering plans or rate hike expectations. That assessment is bearish for gold over the long-run.
Over the short-run, however, we could continue to see counter-trend moves in gold until the “Big Boys” return after the holidays.
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This article was originally posted on FX Empire