Rate Hike Worries Set Aside as Gold Buyers Chase Headlines

Gold futures are trading at their highest level since November 16 early Tuesday, on track for its 10^th gain in 12 sessions. The catalysts behind the move are heightened tensions between Russia and the West over Ukraine that are driving down risk sentiment and fueling a move into safe-haven assets.

While most of the money is flowing into more liquid save-havens like U.S. Treasurys, the Japanese Yen and the U.S. Dollar, some is flowing into gold. Due to the lack of liquidity in the gold market, the price action appears to be a little exaggerated, but nonetheless, one cannot deny the rally even if it looks like it’s being fueled by buy stops rather than aggressive buying.

At 05:46 GMT, April Comex gold futures are trading $1881.00, up $11.60 or +0.62%. On Monday, the SPDR Gold Shares ETF (GLD) settled at $174.78, up $0.97 or +0.56%.

We’re actually looking at a mixed bag of indicators with yields dropping on Friday, but moving higher on Monday. Meanwhile, the dollar was likely being underpinned by expectations of higher interest rates and safe-haven buying. Additionally, while the Dollar/Yen closed higher on Monday, it’s back down early Tuesday.

This type of price action leads me to be cautious about the rally in gold especially with the April Comex gold futures contract headed toward a major 50% to 61.8% retracement zone. Ultimately, it comes down to, should investors chase the market higher or play for a pullback?

Assessing the Scenarios

Some who argue for higher gold prices are betting on robust inflation to continue. But then there’s the Federal Reserve who could hit the market with enough fire power in the form of aggressive tightening to put this argument to bed. So let’s call the inflation issue neutral for the time being.

Gold was flattening out until Friday when a high ranking U.S. representative said a Russian attack on Ukraine could occur at any time. Then early Monday, a Ukrainian official downplayed the news. Then later in the day France’s foreign minister said on Monday that everything was in place for Russian forces to invade quickly in Ukraine.

Short-Term Outlook

At some point in the near future, gold traders are going to have to decide whether to chase the headlines or start thinking about the Fed’s aggressive tightening plans. Given the two options, in my opinion, the best way to trade gold is to follow the U.S. Treasury market.

If yields come down hard due to aggressive safe-haven buying of Treasury bonds, then gold is likely to spike sharply higher.

If yields start to rise again in anticipation of an extremely hawkish Federal Reserve, then gold could rally but gains are likely to be limited.

The more risky trade is buying gold on the headlines while Treasury yields and the U.S. Dollar are rising.

From a technical perspective, trader reaction to $1899.80 to $1951.00 will determine the longer-term direction.