Supported by the banking crisis, investors are concerned about risky assets, with a surge in demand for safe haven and driving the ProShares Ultra Gold ETF (NYSE Arca: UGL) slightly below its 2022 high. Investors flock to gold futures contracts to protect their investments from selling off risky assets such as stocks and commodities.

As the banking industry is currently primarily in the rearview mirror, investors will focus on the broader economic environment to determine whether the gold futures demand tracked by UGL will continue to maintain strong upward momentum.

Specialized

Since the second quarter of 2020, ProShares Ultra Gold ETF has been in a broader downward trend, with trading in a downward channel mode. The support level and resistance level are at $44.20 and $70.42 respectively.

On the daily chart below, ProShares Ultra Gold ETF entered an upward trend after prices broke the 100 day moving average. After rejecting this level, the level of $53.59 formed an intermediate support level, which is consistent with the 100 day moving average and the 50% Fibonacci retreat level, increasing the convergence of the region.

If bullish investors commit to an upward trend, UGL may continue its upward trend, with a level of $70.42 being designated as the level of interest in a bull market. This move can be verified by matching the upward price trend with high trading volume, indicating the existence of a bullish outlook.

Alternatively, if bearish investors participate in the market to increase upward friction, the price trend may reverse. If the UGL reverses and the price approaches the 100 day moving average or support level of $53.59, bullish investors may buy ETFs. Buying can be verified by approaching the level of decline in trading volume mentioned above, indicating that the bearish trend is fading.

basic

The main fundamental factors to consider when seeking to purchase assets based on gold are inflation, interest rates, and the strength of the US dollar. When inflation rises, especially in the monetary hegemony of the United States, the Federal Reserve slows down the economy and consumer spending by raising interest rates, thereby countering price increases. As a result, investors want to invest their funds in high-yield assets, such as US treasury bond bonds and US dollars, at the expense of other assets, including gold.

Therefore, there is an inverse relationship between gold prices and interest rates. Gold shines brightly during periods of low interest rates or economic recession, as investors view precious metals as safe haven investments that can preserve their wealth. As shown in the figure below, when interest rates are in a low state, UGL will accelerate, and vice versa.

From 2006 to 2008 and from 2018 to 2019, federal funds experienced a significant decline, resulting in a 174% and 80% increase in UGL, respectively. Recently, due to high inflation and interest rate environment, UGL has been slightly sluggish, which has made the US dollar shine brightly.

summary

As global interest rates rise to combat stubborn inflation, UGL may remain sluggish in the short to medium term. However, UGL may be boosted by risk aversion demand arising from interest rate cuts or risk contagion. Bullish investors may be more suitable to buy ETFs at discounted prices, making the $53.59 level a feasible price for bulls to enter.