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Gold, War and FED

Every coin has two sides. Uncertainty favors safe heavens. Bull trend is logical. On the other hand, rate hike could spark sales.

Sanctions on Russia

During last weekend World and European leaders have placed sanctions on Russia for Ukraine invasion. The ban from SWIFT (Society of worldwide interbank financial telecommunication) was considered as the “nuclear bomb” of financial system. Simply, cashless payments are out of order. Moreover, SWIFT is not the only heavyweight tool to punish Russia.

In consequence of all sanctions, the chaos is here. At least we can see it in Russia. It´s central bank doubled interest rates from 9.5% to 20%. Russian ruble was hit hard. Depreciation of the currency was approximately 30% at the open. Lot of liquidity providers did not open trading for ruble derivatives.

Golden reserves

Nicky Shiels, head of metal strategy at MKS PAMP SA said: “The purpose of buying gold (in the domestic market), is to monetize it when required,” And added a note. “It’s the fear over potential central bank sales that may overhang the market.” (Source: Bloomberg.com). In addition, time of uncertainty favors safe heavens. Gold opened with gap 2746 points. Friday close on FX market was 1888.86, while today precious metal opened at 1916.32. But opening range high was 1929.64. Volatility is still particularly high and bullion holds buyers attention.

Technical analysis 

In the time of high volatility, probability of creation of price gaps soars. Gold is not an exception. Open gap provided very strong support level at 1891.3, lower level of 123 gap. In addition, market profile in next chart shows support level, created by POC (point of control – biggest traded volume from previous day) at 1888.1. So we can see quite narrow support area 1888.1-1891.3. Another support levels are 1867.4 (Developing monthly VWAP) and 1820.6 (Developing 1st standard deviation of monthly VWAP).

30 minutes chart of GC (Gold futures), Price action. Source: Author´s analysis

Resistance levels has been set by 123 gap from 24th of February. It is area from 1942.6 to 1953.4. Market profile shows resistance level at 1940.4, which is R2 pivot line and area of significant volume around this pivot. This area is affirmed by developing 2nd standard deviation of monthly VWAP at 1942.6. So price around 1940-43 could be interesting level to watch.

30 minutes chart of GC (Gold futures) Daily Market Profile, Source: Author´s analysis

30 minutes chart of GC (Gold futures), Monthly VWAP. Source: Author´s analysis

FED decision

Financial chaos at the markets and possible economic recession, caused by sanctions to Russia, brings highest probability of greater inflation. In general, inflation is what causes the change of monetary policy. Despite the situation of last week, FED willingness to raise interest rates was obvious. In the case, that current situation around Ukraine and Russia conflict sparks the inflation, change of FED policy could be more hawkish. Additionally, gold has no interest, and higher interest rates are not favorable to the yellow metal. Simply, higher interest rates from FED could depreciate gold.

Tomas is a professional trader and money manager on foreign exchange market from 2014. His main domain are commodities. Experiences gained due this period are transformed to consul...

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