Gold prices at 19-month highs amid inflation fear, ETF inflows

Gold prices extended higher during Wednesday’s APAC mid-day trading session as investors assessed lingering geopolitical tensions in Eastern Europe. The yellow metal hit an intraday high of $2,070 on Tuesday, just $5 below its all-time high seen in August 2020. Prices have since retreated to $2,050 as profit-taking activity kicked in. The US and UK planned to ban Russian energy products as part of the sanctions punishing Moscow for its invasion of Ukraine. Their continental European counterparts refused to follow suit however because Russian supply is essential to their energy security. These punishments mark the most stringent sanctions against Russia so far, boosting the appeal of gold to investors that are looking for safety.

The Ukraine war and the follow-on sanctions against Russia – the world’s powerhouse supplier of industrial metals - propelled price gains in a wide range of raw materials. These include crude oil, natural gas, nickel, aluminum, wheat and soybean (table below).

Many of them have seen prices hitting all-time highs recently. This stoked fears about stagflation– a combination of slow growth and high inflation. It is not only the magnitude, but perhaps even more so the speed of the rally that shocked investors. Gold prices were partially driven by rising inflation expectations, as the yellow metal was widely perceived as a store of value and hedge against such risks.

Major commodity prices – YTD performance

With the conflict between Russia and Western powers over Ukraine intensifying, haven demand is likely to keep the yellow metal afloat. In the near term however, the strong rally in gold may entice some profit-taking activity. Meanwhile, the LME halted trading in nickel after its price doubled on Tuesday amid an unprecedented short squeeze. With volatility in the metal market falling, gold prices may cool down alongside the rest of the metals.

The world’s largest gold ETF - SPDR Gold Trust (GLD) – saw large among of net inflow over the last two weeks (chart below). This suggests that more buyers are ramping up to purchase more bullion amid rising geopolitical unrest. The number of GLD shares outstanding increased 13.3 million month-to-date, with the number of holdings hitting the highest level in 12 months. An accelerated pace of subscription to the ETF may be viewed as a bullish signal for prices.

Gold Price vs. GLD ETF shares outstanding

Technically, gold prices breached above multiple resistance levels this week, underscoring a strong upward trajectory. An immediate resistance level can be found at around 2064, the 100% Fibonacci extension. A pullback from here may lead to a test of 2,007 for immediate support. The MACD indicator is trending higher above the neutral midpoint, suggesting that bullish momentum is dominating but prices may be vulnerable to a technical pullback.

Gold - daily chart

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