Investors Duck for Cover, Gold Provides a Haven

2022 has humbled high-flying tech stocks, forcing investors into a risk-off attitude, and sending gold above $1,840/oz.

Key Takeaways:

  • Gold broke through its $1,833 ceiling for the second time in a few months. Will it hold this time?
  • Rising real interest rates could dampen gold’s performance over the next few months, but geopolitical tensions and underperformance in the stock market are keeping the rally intact.
  • Oil prices in the U.S. just hit a 7-year high after several years of stagnation.

Breaking Above Resistance

Gold broke through its ceiling at $1,833 during a nearly 2% surge on Wednesday. This is the second time in the last few months that gold has surpassed this level. The previous rally was short-lived – quickly turning around and sinking back below $1,800.

Will the $1,833 ceiling turn into a short-term floor this time around? Gold needs to hit a higher high in the coming weeks, preferably overtaking the $1,877 level reached on November 16th. A rising dollar index poses a threat to current momentum.

Two breakouts at $1,833

Gold has engaged in some interesting price action since hitting its all-time high in August 2020. The price is clearly facing some strong headwinds, namely a surging stock market and risk-on investor attitude. However, plenty of buyers are helping push the price up, citing inflation concerns and a fragile equities market.

Every few months, gold breaks through a resistance line and finds a new one. Right now we are nowhere near $1,680, but the price also has a long climb before the bulls can start calling for a renewed bull market.

Gold finds new resistance every few months

Geopolitics Spark Interest in Gold

History tells us that gold struggles to perform in the months leading up to an interest rate tightening cycle. The price seems to be ignoring this pattern as of late. Sky-high inflation and geopolitical tensions across Asia and Europe are counteracting the gold’s bearish influences.

The Chinese government is desperately trying to prevent a complete meltdown following the Evergrande crisis. On Monday, Beijing cut interest rates to spark another round of growth. Gross domestic product rose more than 8% in 2021, but momentum is quickly fading.

And of course, there is the looming invasion of Ukraine.

Oil Prices Hit 7-Year High

Crude oil hits 7-year high

Oil prices continue their surge upward after years of relative stagnation. Only a year ago, national gas prices stood at $2.386 a gallon. Today they are pushing $3.314 per gallon. The global oil market is deeply interconnected, so geopolitical tensions that threaten supply only add to the inflationary pressure.

U.S. Stocks Dominate?

The U.S. stock market has been crushing the competition over the last four years. The government has been piling on subsidies while the Fed drops interest rates and pumps capital into the system, which has shifted the economy to overdrive. However, stock market growth has far exceeded companies’ earnings growth. Stock valuations now require future growth to outpace the rate we saw before the pandemic. With monetary tightening on the horizon, this seems unlikely.

The United States is home to an amazing amount of technological innovation. American companies such as Tesla, Apple, Meta, and Amazon are leading the charge. These companies all benefit greatly from low interest rates, meaning the road ahead could be rocky for the American mega-darlings.

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As always, thank you so much for reading – and happy investing!

Additional Resources:

Metals Rally Heats Up as Nickel Hits $24,000 on Supply Snarls (Yahoo Finance)

World’s Safest Company Bonds Have Worst Start to Year in Decades (Yahoo Finance)

Market, Omicron risks pose new challenge for Fed policy pivot (Reuters)

China cuts key rates, steps up monetary stimulus to boost economy (Reuters)

U.K. Suffers Double-Digit Inflation for More Than 10% of Items (Yahoo Finance)