XAU/EUR continues upwards momentum, now above $1620 as inflation fears support gold

• XAU/EUR has continued its run higher and is now above $1620 amid continued inflation fears.
• Bullish technicians will now target a move towards Q4 2020 highs at $1650.

Since breaking above key resistance at $1590 (the prior 2021 high) and then the psychologically important $1600 level on Wednesday in wake of a much hotter than expected US inflation report, XAU/EUR has continued to advance. Euro-denominated spot gold prices now trade to the north of $1620, with further gains of about 0.7% on the day (after rallying nearly 2.00% on Wednesday). Now that XAU/EUR has cleared prior year-to-date highs and the $1600 level, bullish technicians will set their sights on the next key area of resistance, which comes in the form of the Q4 (November) 2020 highs at just above $1650.

Since bouncing from its 50-day moving average on 3 November all the way down at $1520, euro-denominated spot gold prices have surged nearly 7.0%. That coincides with a sharp downturn in Eurozone (and global) real yields; German 10-year inflation-linked bond yields are down more than 20bps from above -1.80% (on 3 November) to current levels below -2.0% and hit fresh record lows earlier in the week at -2.09%. Lower real yields on bonds reduce the opportunity cost of holding non-yielding precious metals.

Inflation anxiety

Record low long-term real yields in the Eurozone (and not far from record lows in the US) also reflect a market view that central banks are going to keep their monetary policy settings highly accommodative over the coming years, despite the sharp uptick in global inflationary pressures in recent months. There are going fears that this might constitute a policy mistake; i.e. that central banks might make a dovish policy mistake and not normalise monetary policy setting quickly enough to tame inflationary pressures.

Such fears were ignited by Wednesday’s US inflation report and prompted a number of high-profile market commentators and investment advisors to call for the Fed to abandon its insistence that inflationary pressures are transitory and to accelerate the timeline of monetary policy normalisation (i.e. the QE taper and then rate hikes). In light of heightened inflation fears, it is not surprising to see investors flock to assets that provide inflation protection, such as precious metals and inflation-linked bonds.