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Abstract: Gold stands out as a result of growing inflation concerns, a weaker dollar, and the weakness of Bitcoin. Inflation jitters caused by record economic data expose central banks to a predicament when continuing quantitative easing, although many economies are recovering strongly. Can gold continue to rise against the backdrop of quantitative easing and higher inflation?

Since May, gold prices have regained upward momentum after a run of losses at the start of the year. It briefly hit $1,900 an ounce, its highest level in nearly four months. On the one hand, the surge in commodities encouraged investors to load up on gold as a counterweight to rising prices, and the higher-than-expected U.S. inflation added to fears that the Fed will tighten its quantitative easing (QE), meaning higher inflation seems to be on the horizon. On the other hand, Bitcoin, the most brilliant financial performer this year and previously hailed as "digital gold", suffered a sell-off. The price once fell from nearly $60,000 per bitcoin to $30,000 per bitcoin, a 50% drop in just two weeks. That, in turn, reflects a shift of assets away from the volatile cryptocurrency market into gold. With bullish sentiment creeps back, how will gold perform in the future?

The dollar regained an upside opportunity after U.S. CPI jumped in April to their highest level since 2008, pushing 10 year Treasury yield briefly above 1.7%. But that didn’t last long, as the dollar faced a tug of war between strong U.S. growth and higher inflation expectations. Rising inflation undermined the dollar's value while record economic data supported it to rise. But However, the strong recovery of the U.S. economy seemed to be making higher inflation a foregone conclusion. The Markit flash PMI for manufacturing and services sectors suggest the U.S. economy may have accelerated dramatically in May, which could fuel further inflation fears, so the dollar may continue to weaken and gold has room to rise.

Bitcoin had previously been seen by many investors as a safe haven to compete with gold due to the limited supply of both assets. While they still believe Bitcoin as having significant advantages as a store of value akin to "digital gold," rising inflation was making investors increasingly aware that Bitcoin had been overvalued. That, coupled with Elon Musk's comments about the energy cost of Bitcoin mining, a crackdown by the Chinese government on Bitcoin, and a possible tax review in the United States, led to a sharp drop in the price of the Bitcoin. JPMorgan Chase, an institutional investor that had predicted Bitcoin could rise to $130,000, said concerns about inflation are causing some institutions to swap Bitcoin for gold. Not only that, hedge funds and other large speculators increased their net long positions in U.S. gold futures and options to the highest level since January, according to Bloomberg. After three months of outflows, gold ETF holdings rose sharply in May. That suggested demand for gold as a store of value was rising on the back of higher inflation, and that the wild swings in the Bitcoin market provided a significant boost to the rise.

As the conflict between the job market recovery and rising commodity prices intensified, pressure on the Fed to develop a realistic monetary policy was mounting. The possibility that the central bank will tighten its QE to curb rising inflation would certainly dampen the recovery in the US labor market. But if the Fed does not act, rising prices will hurt the economic recovery. The Fed has said that high inflation in the United States proves temporary, but if it does not abate in the next few months, then the tightening of QE could come sooner. Separately, newly released Fed minutes showed some officials were willing to put a discussion on tightening the pace of bond-buying on the agenda, raising expectations for a rate hike. In addition to the Fed, the BoE has begun to cut the pace of its weekly bond purchases, but the ECB appears hesitant. As a result, If central banks signal such an aggressive fight against inflation, gold's upside could be stymied.

Gold rose steadily from its double bottom pattern in mid-April as Treasury yields retreated. After trading in a narrow range for nearly a week, it ascended above the key resistance level of $1800 an ounce in early May. The uptrend has since expanded further. Then the precious metal was pushed to $1,900 an ounce, its best performance in nearly four months, by a weaker dollar and lower Treasury yields which reduced the opportunity cost of gold holding, as shown below:

Source from: Mitrade

Technically, the 20-day and 50-day and 100-day MA formed a "golden cross", indicating that gold could remain bullish, but the RSI crossed into the overbought territory and the resulting short-term technical consolidation could damp the bullish sentiment. If gold is supported by the news to rise, then investors should pay attention to the $1920 resistance level.

All told, prematurely tightening QE by central banks will hurt gold in the long run, as excessively high inflation threatened the economic recovery. But in the short term, rising inflation and the central banks' doves stance may continue to drive gold prices higher. Moreover, the better-than-expected economic data from various countries brought good news to the market but may increase investors' fear of tightening QE ahead of time, thus creating wild fluctuations in gold prices, which also provides trading opportunities for short term investors.