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Asset Watch

Is gold repeating its pattern from June?

 

Thursday, December 29, 2022

After China scrapped its zero-COVID policy on Dec. 26, the crisis was downgraded to a Category B from the top-level Category A, and its National Health Commission announced that inbound travelers won’t need to quarantine starting on Jan. 8. As a result, the world’s second-largest economy is back in business, and the commodity bulls celebrated the policy shift.
To that point, the reopening optimism helped push gold to a six-month high on Dec. 27, as a dormant U.S. dollar also increased its fundamental appeal. However, with the technical setup eerily similar to the June swoon, will gold’s celebration be short-lived?
To explain, gold consolidated around its 200-day moving average in May and June before sinking to a new 2022 low. Consequently, the indecision highlighted the push-and-pull dynamics of high inflation (bullish) and higher interest rates (bearish).

Yet, a similar pattern is present on the right side of the chart. Recently, gold has been glued to its 200-day MA, as the bulls keep the price elevated, while the bears attempt to tear it down. In addition, U.S. nominal and real (inflation-adjusted) interest rates have risen materially in December, which helps explain the yellow metal’s recent indecision.

So, with the fundamental backdrop increasingly cloudy, should you remain bullish as long as gold exceeds the 200-day MA, and turn bearish if a breakdown occurs?


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