Gold snaps three-week losing streak even as oil prices rise, triggering stagflation fears

The gold market is looking to end the week slightly above initial resistance at $4,500 an ounce. Analysts note that the yellow metal has made significant progress after falling to $4,099 at the start of the week. They add that Friday’s rally comes even as oil prices and the U.S. dollar push higher.

Spot gold last traded at $4,525.70 an ounce, up more than 3% on the day and 0.65% from last Friday. At the same time, May West Texas Intermediate (WTI) crude futures are above $98 a barrel, up nearly 4% on the day.

Although it is too early to signal a clear sentiment shift in the marketplace, Michael Brown, Senior Market Analyst at Pepperstone, said this is a good start.

“This suggests that we might well have put in a durable bottom, and that gold’s haven dynamics could well be starting to reassert themselves to an extent,” he said.

However, Brown noted that despite the positive price action, there are still plenty of risks in the marketplace, especially if a prolonged war with Iran causes more central banks to monetize their official gold reserves.

Updated reserve data published Thursday by Turkey’s central bank showed it monetized nearly 60 tonnes of gold in the last two weeks.

“If more were to follow, then that would exert some notable downward pressure on spot, basically slamming into reverse the dynamic that we saw driving prices higher for the last two or three years,” said Brown. “That said, I think $4,100/oz does look like a significant turning point, and in the short term at least I’d be surprised if we make any forays below that level, with the bulls likely to defend it very strongly indeed in the event of a renewed move to the downside.”

Commodity analysts at TD Securities also expect further weakness in the gold market, as central banks use their official reserves to fight rising inflation driven by higher energy costs.

“Gold is trading as a risk asset because its structural bid from the official sector has been intrinsically tied to USD diversification, which feeds into USD surpluses. The war in the [Middle East] has inflicted significant damage to Gulf economies, but has also significantly reduced surpluses in East Asia, creating a rupture in official sector demand for the time being,” the analysts said in a note.

Neil Welsh, Head of Metals at Britannia Global Markets, said that despite some bargain hunting this week, the gold market is still in wait-and-see mode, looking for evidence that the ongoing chaos in the Middle East is either contained or prolonged enough to drive renewed safe-haven demand.

“That turn has not happened yet, but the conditions may be forming,” he said. "It is possible gold was overdone on the way up. We are down around 20% from the highs of the end of January, and the rebound from below $4100 is encouraging, but there are many dynamics influencing price at the moment. Once the circumstantial influences settle, we may see gold return to its natural role as a safe-haven trade."

Analysts have said that a prolonged conflict driving energy prices higher is stoking stagflationary fears, although risks are still relatively low, which they describe as the perfect environment for gold. In such a scenario, central banks would be forced to cut interest rates in an inflationary environment, driving real yields sharply lower.

Aaron Hill, Chief Market Analyst at FP Markets, said it is still a little too early to start worrying about stagflation, but those fears could continue to grow next week as the market receives important manufacturing data.

“Stagflation fears are only likely to overshadow pure energy-driven inflation threats once growth data clearly softens (weaker PMIs, rising unemployment), as that classic 1970s dynamic often pressures gold short-term before it shines,” he said.

Hill added that gold prices would need to see more technical chart improvement before attracting sustained bullish momentum.

“This week’s sharp bounce off the sub-$4,100 lows look like a liquidity sweep rather than a confirmed bottom; a sustainable base probably requires a retest or hold of the $4,200–$4,300 zone with stronger momentum before any convincing rally toward $4,800+ can develop,” he said.

Naeem Aslam, Chief Investment Officer at Zaye Capital Markets, said that although he can’t rule out lower gold prices in the near term, he continues to see lower prices as a buying opportunity. He added that the inflation threat continues to grow, supporting gold as a hedge against weakening purchasing power.

“We have already started to hear from retailers that they are under pressure and if the war drags on any longer, prices would rise. So inflation is actually on our doorstep, and it is knocking hard,” he said.

Although it will be a shortened trading week because of the Easter long weekend, there will be renewed focus on the U.S. economy with the release of employment and industry reports.

While markets will be closed for Good Friday, it is not actually a government holiday in the U.S., so the March nonfarm payrolls report will still be released. Investors will have to wait until the Asian open on Sunday to react to the data.

Markets will also be anxious to hear what Powell has to say as he participates in a moderated discussion at Harvard University.

With markets closed Friday, ADP’s private-sector employment data will garner significant attention next week, along with job opening numbers.