Worry about the Fed, worry about heightened tensions in Ukraine support gold

Although market participants are anticipating the certainty of a series of interest rate hikes, the completion of their tapering of monthly asset purchases resulting in a much less accommodative monetary policy, there is still concern about the Federal Reserve’s plan to reduce inflationary pressures by tightening their monetary policy. However, questions remain as to how hawkish or aggressive their updated monetary policy will be.

In other words, the devil is in the details, and the details will be made much clearer to us tomorrow when the Federal Reserve convenes its FOMC meeting releases their updated monetary policy statement and Chairman Powell holds a press conference. The statement, as well as a press conference, could reveal the Fed’s plans to reduce their asset sheet which is approaching $9 trillion. It will also confirm if the tapering process which began in November will conclude as expected in mid-March. Most importantly, market participants will gain insight into how quickly the Fed intends to raise rates over the next two years.

There is also real concern over the increased tensions in regards to Russia’s buildup of troops and equipment on their border with Ukraine as well as potential responses by the United States and NATO.

In March and April 2021 Russia moved about 100,000 soldiers and military equipment near its border with Ukraine. According to Wikipedia, “This move represents the highest force mobilization since the country's annexation of Crimea in 2014. This precipitated an international crisis and generated concerns over a potential invasion. Satellite imagery showed movements of armor, missiles, and other heavy weaponry. The troops were partially removed by June. The crisis was renewed in October and November 2021, when more than 100,000 Russian troops were again massed near the border by December.”

While Russia has not invaded any Ukraine territory the potential of an invasion has resulted in a response by NATO and the United States. NATO has sent ships and fighter jets to Eastern Europe.

According to Reuters, “NATO said on Monday it was putting forces on standby and reinforcing eastern Europe with more ships and fighter jets, in what Russia denounced as Western "hysteria" in response to its build-up of troops on the Ukraine border.” Reuters also reported yesterday that the United States put 8500 troops on heightened alert and are currently awaiting orders to deploy to the region should Russia invades Ukraine.

Collectively these concerns have been highly supportive of gold recently taking gold to the highest level since the middle of November. After trading to a double bottom on December 15 which matches the lows of November 3 gold has moved up substantially. Interestingly, both lows of approximately $1760 occurred on the concluding day of the Federal Reserve meeting for November as well as December. Since the December low we have seen gold move from a low of $1752 to today’s intraday high of $1854.20, just over a $100 move.

As of 4:30 PM EST gold futures basis the most active April 2022 contract has backed off of the lows seen today and is currently fixed at $1848.30 after factoring in today’s gain of $6.60. Mild headwinds from dollar strength did not any substantial effect on Gold today.

Our technical studies confirm that gold’s high came in slightly above the first level of resistance that we have identified which occurs at $1851. This resistance level is based upon the 23.6% Fibonacci retracement from a data set (data set one) beginning on November 3 with gold at $1750 and concluding on November 16 when gold reached a high of $1879.60.

Should this resistance level be taken out the next resistance level occurs between $1867.50 which is based upon a 78% Fibonacci retracement from data set (data set 2) that begins in June with gold at $1920 and concludes in August when gold reached the low of $1678. Above that is major resistance at $1880 which is based upon the recent top that occurred on November 16.

Our studies also indicate that the first level of support occurs at $1828 which is based upon a combination of both data sets. The 61.8% Fibonacci retracement from data set 2 occurs at $1867, followed by the 38.2% Fibonacci retracement from data set 1 which occurs at $1833.

Wishing you as always good trading and good health,