The Fed’s intention to turn a blind eye to the GDP slowdown and do everything possible to stop inflation creates a headwind for gold, while events in Ukraine act as a XAU growth driver. How will this affect the future of gold? Let’s discuss the topic and make up a trading plan.
Weekly gold fundamental analysis
The pandemic has taught traders to act quickly. In March 2020, the S&P 500 fell by 36% from its February highs, followed by an over 120% rally. In April 2020, Brent hit a 20-year low, after which its price increased eight times. If you miss the moment when the driver that scares the markets disappears, you can miss the opportunity. All this applies to the armed conflict in Eastern Europe. Hopes for its quick end forced investors to get rid of the commodities.
It’s no secret that oil, gold, palladium and other commodities have benefited the most from Russia’s invasion of Ukraine. Brent soared to 14-year highs. The gold was ready to update the high, if not for Kyiv’s statement about its readiness to discuss the country’s neutrality. The market completely forgot that the territorial integrity of Ukraine was not discussed. Obviously, the de-escalation of the conflict will make the winners losers, so traders rushed to exit XAUUSD longs, which are now near the 19-month high.
In my opinion, the main reasons for the expected gold rise above $2,000 per ounce two weeks ago were the high demand for it as a safe-haven and the fall in real yields of US Treasury bonds. Indeed, amid the fighting in Ukraine, ETFs hit 3174 tons, increasing by 134 tons from their December low. The final figure is 292 tons below the 2020 record high.
Dynamics of gold and ETFs
Source: Bloomberg, Saxo Group.
Fears for the fate of the global economy forced investors to return to US Treasury bonds’ purchases. As a result, their profitability has declined. The rate spread between 10-year Treasuries and inflation-protected securities soared, signaling rising inflationary expectations. In such conditions, the real yield of debt obligations, which highly correlates with gold, declined.
Dynamics of bond yields and inflation expectations in the US
Source: Bloomberg, Saxo Group.
Having understood the reasons for the XAUUSD rally, it is possible to predict further gold dynamics. In my opinion, its fate will be influenced by two factors, the development of the situation in Ukraine and the Fed’s position on inflation and economic growth. The de-escalation of the military conflict will lead to a reduction in ETF stocks and an increase in treasuries’ yield. As long as the war in Eastern Europe continues, it is unlikely that gold will correct a lot.
Weekly gold trading plan
As for the Fed, over the next few meetings, it will face inflation significantly exceeding the target. It is hard to imagine that the central bank would not pay attention to this. The Fed will raise rates until the economy begins to cool. Based on two opposite factors, the gold price may consolidate in the range of $1950 – 2050. It will make it possible to sell XAU on the rise and buy on the decline.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.