This week, the gold market is showing signs of uncertainty (below weekly chart). The current price action is an inside period (the weekly candle is still to complete). I.e., the week's high and low are within last week's range. Neither the bulls nor the bears have taken the price to a new high or low, suggesting indecision amongst market participants. The shape of the candle is a spinning top, which is a candle of hesitancy. In our opinion, the trajectory of gold is a function of a stagflation scenario. If energy prices continue to rise, this will cause dislocation to the economy's supply side. This disruption, in turn, is likely to result in higher inflation (in an already high inflationary environment) and lower growth. These symptoms are typical of stagflation. This situation will pose a dilemma for policymakers. While promoting growth, expansionary fiscal or monetary policy will exacerbate inflation. However, contractionary policies will further impinge on growth while alleviating the high prices. If this scenario materialises, gold may increase due to its status as a haven and store of wealth. The stochastic will then move into its 80+ areas (green rectangle). The longer it holds this position, the higher gold is likely to appreciate, and a stagflation scenario becomes a distinct possibility.
The spike in oil is a direct result of the Russian invasion of Ukraine that continues to ripple through the financial markets. Hopefully, the conflict will deescalate and evolve into diplomacy. If this happens sooner rather than later, energy prices will likely pull back. In this case, the demand for gold may waver as markets turn their attention back towards demand-pull inflation and actions by central banks. This normalisation will tend to be USDOLLAR supportive. Given these two scenarios, participants are at a crossroads, as reflected in gold's current inside period.
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.