Gold: Stagflation fears are supporting fresh new all-time highs
The recent three weeks of sideways movements of the US Dollar Index since its 52-week high of 110.18 printed on 13 January had a positive knock-on effect on gold prices.
Gold (XAU/USD) has staged a bullish breakout from its prior two-month range configuration on 21 January and rocketed by 4.4% to print a fresh intraday current all-time high of US$2,865 at this time of the writing.
Global trade tensions have triggered stagflation fears
Fig 1: 5-year & 10-year US breakeven inflation rates major trends as of 4 Feb 2024 (Source: TradingView, click to enlarge chart)
US President Trump kickstarted Trade War 2.0 on Saturday, 1 February ordered sweeping tariffs on goods from Canada, Mexico, and China.
Even though the 25% trade tariffs on Canada and Mexico have been delayed for a month, the10% tariffs targeted on Chinese goods are now “lived” and Chinese policymakers have retaliated by imposing 10% to 15% levies on US energy and agricultural exports to China with a targeted kick-in deadline on next Monday, 10 February.
In addition, China has also drawn up plans to disrupt key mineral supply chains in the US and curb business operations of US companies on the mainland. Google has been singled out for antitrust violations, and new export control orders have been issued on tungsten and other critical minerals used in electronic, aviation, and defence industries.
Trade War 2.0 is different from the US-China Trade War 1.0 enacted in January 2018 in terms of coverage as this time round it involves major trading partners of the US, on top of the ongoing US-China Tech War.
Hence, countries that have a significant trade surplus with the US will be at risk of being targeted by Trump’s trade tariffs policy; the European Union, Japan, South Korea, and ASEAN export-dependent countries such as Vietnam, and Malaysia.
If trade negotiations are not able to reach the “middle ground” between the US and the targeted countries, tit-for-tat retaliation measures may escalate, and global trade is likely to be disrupted which in turn can cripple global growth prospects and ignite inflationary pressures.
Market-transacted financial instruments have started to price in a further uptick in US inflationary expectations as derived from the movements of both the 5-year and 10-year US breakeven inflation rates that have been trending upwards since the start of the current Fed’s interest rate cut cycle on September 2024.
Both the 5-year and 10-year US breakeven inflation rates have just staged a major bullish breakout from a two-year plus of basing formation to rally towards 2.59% and 2.44% respectively as of 4 February 2025, above the Fed’s long-term inflation target of 2% (see Fig 1).
These observations suggest the odds of a stagflation environment have increased.
Medium-term bullish momentum remains intact for Gold
Fig 2: Gold (XAU/USD) medium-term & major trends as of 5 Feb 2025 (Source: TradingView, click to enlarge chart)
Key technical elements of Gold (XAU/USD) have remained constructive for the continuation of its impulsive upmove sequence within its ongoing medium-term (multiweek) and major (multi-month) uptrend phases.
The daily RSI momentum oscillator has reached an overbought region, but it has not flashed out any bearish divergence condition which suggests that the price actions of Gold (XAU/USD) may stage a minor pull-back after its recent swift rally in the past week rather than a medium-term bearish reversal movement.
Watch the US$2,716 key medium-term pivotal support (also the 50-day moving average) with the next medium-term resistances coming in at US$2,933 and US$3,033/3,084 (see Fig 2).
On the other hand, a break below US$2,716 invalidates the bullish scenario for Gold (XAU/USD) to kickstart a potential multi-week corrective decline within its major uptrend phase to expose the next medium-term support at US$2,537 (also the 200-day moving average).
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