Have The Fears Of Snowballing Inflation Rates Reignited The Gold Surge?

The escalation in global inflation has led to investors rushing to seek reassurance and long term value in the asset of choice; precious metals and has therefore triggered the jump in gold’s price. But how long can this uptrend be sustained for? Inflation has risen drastically in the UK, US, Germany and China. The US CPI rose to 6.2% in October, the highest since 1990, while the UK inflation rate had reached the highest since November 2017 for two consecutive months; 3.2% in August 2021 and 3.1% as of September 2021.

Figure 1

Figure 1 depicts the chart for iShares Physical Gold ETC. After reaching all time highs in August 2020 amidst the Covid panic, its price has been on a downtrend, fluctuating between within the channel displayed. Since the March 2021 lows, price action has been ranging between £2,400 and £2,600, often testing the resistance level just above £2,600. This week gold finally climbed past the resistance level which was intact since May 2021. With gold now trading close to its 2021 highs, the RSI is above the overbought levels at 70% which has previously indicated market peaks. If the RSI continues to remain above the 50% level, adhering to the OBOS levels which had persisted throughout the Jan 2020 to Aug 2020 uptrend, it is a strong indication that the current uptrend will sustain and move higher.

Figure 2

The Fibonacci analysis exhibited in Figure 2, presents a further optimistic argument. The Fibonacci levels throughout the downtrend from the high at A to the low at B, highlights a resistance formed at the 38.2% level that had been tested on multiple occasions. Taking a Fibonacci extension of the downswing from the high at C to the low at X shows the 127.2% level coinciding very closely with the 50% retracement. It is noteworthy that price has broken past the 38.2% resistance and briefly over the 127% extension and 50% retracement confluence. The additional confluence whereby the 161.8% extension coincides very closely with the 61.8% retracement is anticipated to behave as resistance. The bulls should observe this higher confluence zone carefully as failure to rise above it can signify a potential reversal. However, considering the gold price has lately had the ability to push above previous resistances, the momentum is with the bulls as further confirmed by the ascending triangle as portrayed in Figure 1.

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