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World’s largest asset manager Blackrock warned about prices picking up due to “stabilizing oil prices and a tighter labor market… “. They recommend protecting against inflation through inflation-linked bonds and gold. As published in a previous note, we believe the US dollar will set the tone for the market: US dollar is Guiding the Market. Hence we see two possible scenarios for Gold.
Scenario 1: The USD weakening further
A weaker dollar would further support equities and risky assets, as it eases pressure on China to devalue and supports export-oriented emerging markets. Commodity prices, which are quoted in dollar, will also automatically rise. In turn rising commodities will raise actual and expected inflation giving Gold a double-tailwind effect from both the falling dollar and rising inflation. This would be a time when both equity markets and gold rise conjointly, although the upside potential seems more interesting on the precious metal.
Scenario 2: A rising US dollar
The rising dollar would quickly bring back the fears inherent at the start of the year. The volatility will hit the roof which will increase the demand for safe haven assets. As a reminder, as the equity market were diving during January and February, Gold managed to gain 20%. The precious has since then retraced about 5%, as equity market came back into positive territory, yet it is still the best performing commodity year to date, up 15%.
Technically the bearish trend has shown signs of exhaustion. Gold has yet to break above 1280-1300 (on a daily close) to confirm a definitive end to the long term bearish trend. As long as Gold remains above 1200, we would favour an upmove towards 1270. A break above 1300, would open the way towards the top of the bearish channel at around 1420, with a chance to reach 1500 by year end.