Gold Price Analysis: XAU/USD prices stabilise having seen earlier gains eroded

• Spot gold prices saw whipsaw price action on Thursday, rallying from around $1840 to highs in the $1860s and back again.
• The rally tracked upside in silver as speculation grew about retail interest.

Spot gold prices saw whipsaw price action on Thursday, rallying from around $1840 to highs in the $1860s in tandem with a sudden move higher in spot silver prices prior to the start of US trade, only to then sharply reverse back to the $1840s again and to finish the trading day broadly flat. $1835 seemed to offer a solid floor to the price action.

Fundamentals didn’t matter

Fundamentals seemed not to matter too much on Thursday. In other words; gold prices were unresponsive to tier one US data releases; preliminary US Q4 GDP printed inline with expectations but confirmed the much-anticipated slowdown in US economic activity into the back end of 2021, while weekly jobless claims data was a little better than expected, but initial jobless claims were still at historically high levels and above levels from last September/November.

Nor did gold prices really case much about a much faster than anticipated surge in the YoY rate of inflation in Germany; the headline YoY rate of inflation jumped to 1.0% from -0.3% in December, more than the expected rise to 0.7%. Meanwhile, Germany’s core inflation metric, HICP, surprised by rising to 1.4% YoY from 0.6% in December versus expectations for a drop to 0.3%. The surge was mainly as a result of the reversal of a VAT tax cut in 2020.

ING suggests that Thursday’s “inflation number is just the beginning of a period of significantly higher headline inflation in Germany… the full impact of higher energy prices compared with last year will show in the coming months”. However, before people get too worried about the incoming wave of inflation, the bank notes that “the economy will not reach its pre-crisis level before early-2022, unemployment and insolvencies are bound to increase and a further euro appreciation will be rather deflationary, putting a lid on any inflationary pressure”.

Just as a rise in the hard inflation data didn’t do it for gold, a rise in US inflation expectations, implied by US government bond markets, didn’t impact the price action much either; 10-year break-evens jumped 6bps to back above 2.11% on Thursday and 30-year break-evens rose an even sharper 7bps, also to back above 2.11%. Precious metals are seen as the ultimate hedge against inflation, hence higher inflation expectations ought to be offering the complex some support.

Driving the day

Gold prices were instead focused on the curious state of current market psychology; much attention has been paid to the army of retail traders who have been attempting to bid up hedge-fund shorted stock prices in order to essentially enrich themselves by forcing a short-squeeze. With retail brokerages struggling to manage the volatility and placing restrictions on retail traders ability to trade their favourite stocks (the more cynical amongst us suspect this may have been coordinated with the hedge funds), attention began to turn to other assets that the retail traders could pump. A post on the popular with retail trader subreddit WallStreetBets that went viral urged retail investors to force a short-squeeze in silver and, shortly before the US cash open, silver prices rocketed (and, indeed, as still substantially higher on the day). Gold saw upside in tandem. Perhaps traders realised that, if the power that be won’t allow a short-squeeze to occur in small cal stocks, the most certainly won’t allow it in precious metals, and this may have contributed to the profit-taking that saw gold slip back the where it started the day.