(Kitco News) - After bouncing off a nine-week low at the start of the week, the gold market is seeing some new technical buying, pushing prices to resistance at around $1,850 an ounce. According to one market analyst, this could be the start of a bigger bullish move as the Federal Reserve is unlikely to bring inflation back down to its 2% target.
In an interview with Kitco News, Michele Schneider, director of trading education and research at MarketGauge, said that if investors want to know where gold is going, they should pay closer attention to sugar prices.
The little-watched commodity is currently trading around $0.205 per pound. Last month sugar pushed to a multi-year high above $0.21. At the same time, sugar prices are up more than 120% from their 2020 COVID-19 lows.
Unlike other agricultural commodities like wheat and corn, sugar has maintained most of its gains following the global pandemic market disruptions. Schneider said elevated sugar prices indicate that inflation is not going away.
"Sugar is in everything, which means it will keep food prices elevated globally, and there is not much the Federal Reserve will be able to do about that," she said.
Late last year, food shortages of sugar, vegetable oil, rice and even bottled water in Tunisia caused fights to break out among consumers waiting in food market queues. Schneider said that supply disruptions with reduced exports from India and Russian sanctions, as its invasion of Ukraine enters its second year, could lead to higher sugar prices through 2023.
"The sugar market appears to be this underlying indication that we haven't seen the peak in geopolitical problems. We haven't seen the peak in social disruption, and therefore we haven't seen the peak in inflation," she said. "This also means we haven't seen the peak in gold and silver."
While sugar has been the quiet indicator Schneider is watching, she said it is not the only commodity that points to higher inflation. She explained that supply constraints in most industrial metals, like copper, aluminum and tin, will continue to support higher prices and will ultimately filter down to consumers, keeping inflation elevated.
Schneider said that there are already signs that gold investors doubt that the Federal Reserve will be able to raise interest rates enough to cool down inflation.
After a strong start to the year, February was gold's worst month since mid-2021. The gold market saw a sharp decline last month as interest rate expectations started to shift, with investors looking for the Federal Reserve to maintain higher interest rates for longer than initially anticipated.
However, Schneider said that despite gold's selloff, it had held critical support. She added that she expected gold prices to hold their ground at $1,800 an ounce.
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"No matter how unpopular gold has gotten, its price action tells me that investors are still worried about inflation and protecting themselves," she said.
Gold's new momentum comes as market chatter highlights growing prospects that the Federal Reserve could raise interest rates to 6%. At the same time, the yield on 10-year notes has briefly pushed to 4%. The two-year yield remains at a multi-year high of around 4.8%.
Schneider also noted that despite gold's selloff, it continues to outperform the S&P 500. She said that as soon as it becomes clear that the Federal Reserve cannot cool inflation, gold will take off to new highs.
"It's going to take just one little catalyst to ignite a bigger rally in gold," she said. "Whether that is inflation as sugar prices rally or some geopolitical event, it won't take much for conditions to spiral out of control."
Although investors go back and forth over a potential recession, Schneider said that the bigger threat to the economy remains stagflation, a period of lower growth and high inflation.
"It's not about the doom and gloom. My job is not necessarily to predict but to forewarn and prepare people," she said.
