XAU/USD rally is vulnerable to reversals – TDS

Gold climbed by some 1.3 percent on Wednesday and Thursday as inflation eases, but a sustained rally is unlikely for now, Bart Melek, Head of Commodity Strategy at TD Securities, reports.

Rallies may soon run out of steam

For Gold, rising real rates as inflation eases and policy rates stay at the terminal level for a prolonged period may again drive specs away. In addition, the high rate environment, weak Chinese economic performance and a pending recession in the US will no doubt weaken the demand for more industrial metals like Copper and Silver for many months to come. While industrial demand is on the wane into 2023, the unplugging of COVID inspired bottlenecks in the supply chain will likely see mine and smelter production make more metal available.

This may well mean that the Gold, Silver and Copper rallies, which to a large degree have been short covering driven, may soon run out of steam as high opportunity and carry costs prevent any additional meaningful increase in long exposure. New longs are needed to move these markets past resistance, into bull territory. 

This rally is vulnerable to reversals, should the Fed’s policy rhetoric remain hawkish and if US data surprises to the upside.