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Asset Watch
Tuesday, February 18, 2025
Hot inflation, cool retail sales, and a potential easing of geopolitical tensions have investors befuddled about the short-term outlook. On the one hand, weaker consumer spending could aid the Fed in its quest to lower interest rates. On the other, it could be a sign of weaker U.S. GDP growth in the months ahead.
Either way, with all of the crosscurrents affecting risk assets, will gold be a casualty over the next several weeks?
While gold has materially outperformed most assets over the last 12 months, the fundamental backdrop could be shifting.
For one, peace talks between Russia and Ukraine could ease global conflict risks and reduce the war premiums embedded in the gold price.
Second, the Trump Administration’s DOGE task force has cut government staff and aims to reduce fiscal spending. The decrease in the money supply could reduce inflation and hurt gold’s prospects.
Finally, the yellow metal remains overbought on long-term timeframes after recording seven consecutive weekly gains. Prior periods of similar strength have preceded pullbacks.
A bearish development plaguing gold is the shooting star candle that printed last week. If you analyse the right side of the chart, you can see that gold rallied sharply, as evidenced by the long wick. However, it ended the week near the lows (the green body), and the pattern looks like an upside-down hammer.
More importantly, the three other arrows on the chart highlight how shooting star candles that materialise during uptrends are often warning signs of retracements. As such, caution may be warranted in the weeks ahead.
The 5-week moving average (the blue line) is near $2,800 and is the first line of defence. Up next, the 20-week MA (the yellow line) is near $2,700 and has acted as support several times during the long-term rally. Consequently, you should keep an eye on both in case a correction has begun.
Because the 5-week MA has been a reliable trend indicator, gold deserves the benefit of the doubt until a breakdown occurs. As a result, you could remain long and place your stop-loss order slightly below the 5-week MA, or wait for a pullback and look to re-enter near the 5-week MA if support materialises.
If not, and a breakdown occurs, the 20-week MA could be a solid entry point to position for another comeback.
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