It may be an opportunity for gold bugs to enter the market if investors decide to jump back into the inflation-hedge precious metal!

Gold (XAU/USD) is considered to be a hedge to inflation. Having said that, traders may be wondering why Gold isn’t at all-time highs due to inflation. For example, the US recorded 6.8% YoY inflation in November, its highest level in 40 years.

The reason gold remains at modest levels most likely has to do with global monetary policy. In March 2020, as the coronavirus hit the world, central bankers eased monetary policy to the point where most interest rates were at all-time lows and quantitative easing was at all-time highs! They flooded markets with cash in order to keep the global monetary system operating smoothly. Central bankers were concerned companies and people would hoard cash due to lockdowns and restrictions around the globe, slowing the global banking system. However, there was a major side effect to quantitative easing: investors took the cash and invested it in the stock market.

Fast forward to today. The S&P 500 has doubled since its 2020 lows. Demand for products and services picked up in 2021 and created a supply crunch, which resulted in increased inflation. On December 15th, the US FOMC announced it would end QE in March 2022 and members forecasted 3 rate hikes in 2022 and 3 rates in 2023. The questions traders now should be considering is: As central banks reduce monetary supply, when will investors pull funds out of stocks? With supply-side constraints and inflation rising, when will investors move into safe-haven assets, such as Gold and other precious metals? Will it be at the beginning 2022?

On a weekly timeframe, Gold (XAU/USD) had moved aggressively higher from March 2020 to August 2020 as fear grappled the markets and investors moved into the safe haven precious metal. Price peaked at 2075.11 and began moving lower in a symmetrical triangle formation. Price is currently nearing the apex of the triangle and the 38.2% Fibonacci retracement level from the highs in August 2020 to the lows in March 2021.

Source: Tradingview, Stone X

On a daily timeframe, XAU/USD appears to be trading in a comfortable area near 1800 as price approaches the apex of the triangle. The 50-and 200-day Moving Averages converges just below current levels (1809) and 1800.86 and 1796.49, respectively. Notice that on December 15th, after the FOMC meeting, price dipped below 1758.91, the low on November 3rd. This is important to note because anyone who got long on the move higher after November may have had their stop taken out and are now looking to re-enter long positions. First support is at the previous mentioned moving averages near 1796/1800, then the bottom upward sloping trendline of the long-term triangle near 1770. If price breaks below, it can fall to the December 15th lows at 1753.38. First resistance is at the top, downward sloping trendline of the triangle near 1865, then the 50% retracement level from the recently mentioned timeframe and the November 16th highs near 1876. The June 1st highs at 1916 is the next level of resistance, near 1916.5.

Source: Tradingview, Stone X

If inflation continues to soar and central banks around the world continue to tighten monetary policy, stocks could begin moving lower in the new year. As a result, it may be an opportunity for gold bugs to enter the market if investors decide to jump back into the inflation-hedge precious metal!