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After four weeks of sharp losses and a break below the key $1800/oz level, COMEX gold ended the week with a robust 1.9% gain.

Gold’s sharp fall in the last few days made it susceptible to short-covering moves. Gold corrected more than 10 per cent after testing the $2,000/oz level on April 18 and hit a low of near $1,785/oz earlier this week before rebounding to end the week near the $1,840/oz level.

If we look at US CFTC data, speculators for gold futures raised short positions by more than 35 per cent from the lows in late March.

Gold’s recovery materialized as the US dollar index came off the highs. The US dollar index hit a 2002 high earlier this month amid safe-haven buying and expectations that the US Fed may lead other central banks in tightening monetary policy to get inflation under control.

The US central bank has maintained its stance despite increasing challenges to the global economy and a sharp sell-off in the equity market.

To further emphasize its unfettered stance, US Fed Chairman Jerome Powell this week said that the Fed will keep raising interest rates until there is “clear and convincing” evidence that inflation is in retreat.

While the Fed maintained its monetary tightening stance — the US dollar index came under pressure amid some disappointing US economic data, lower bond yields, and the hawkish stance of other central banks.

US housing, labour, and regional manufacturing indices data this week failed to meet market expectations. Central banks across the globe are under pressure to act to get inflation under control.

The European Central Bank’s monetary policy account released this week further cemented market expectations that the central bank may raise interest rates soon.

The Swiss National Bank, which has so far maintained support for ultra-loose monetary policy, indicated that it is ready to act if inflation strengthens further.

UK’s inflation data released this week showed that consumer prices rose at the fastest annual pace in 40 years last month. Inflation data added to market expectations that the Bank of England may continue its monetary tightening cycle.

Gold came off the highs also as market players shifted focus from the US dollar to other safe havens. In the last few days, we saw a shift from riskier assets like commodities and equities to the safety of the US dollar.

With persisting challenges in the form of slower economic growth, higher inflation, geopolitical risks, and China’s struggle to control virus spread, the market focus shifted to other traditional safe havens like bonds, the Japanese Yen, and the Swiss Franc.

These safe haven assets became attractive also due to lower prices. The Japanese Yen slumped to a 2002 low against the US dollar earlier this month but has now registered two weeks of consecutive gains.

The US 10-year bond yield jumped to a 2018 high earlier this month but has dropped for the last two weeks. Swiss Franc hit a 3-year high earlier this month but witnessed a sharp rebound to test a 3-week high. Gold also joined the rally across safe havens and ended higher.

Gold’s rebound also caused ETF investors to re-enter. Gold holdings with SPDR ETF fell for nine consecutive sessions to March lows before a modest net inflow late last week.

ETF buying has been highly price-sensitive in the last few months and we saw renewed buying interest this time as the price managed to hold near the key $1,800/oz level.

Gold has come off the low, but the question is whether this rally can continue or not. While global growth worries, inflation concerns, and geopolitical tensions are supportive of gold, the metal is still closely linked to the trend in the US dollar.

The US dollar has shown some signs of exhaustion and we may see some extended losses as other central banks act to get inflation under control and stabilize currency movement.

However, a sharp and sustained decline in the US dollar is unlikely unless the Fed softens its approach to monetary tightening.

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