The unusual nature of inflation keeps gold relevant. Rising commodity prices leave the Fed on the sidelines. The US regulator is unlikely to stop the price growth. This allows the XAUUSD bulls to provide active resistance. Let’s discuss the topic and make up a trading plan.
Weekly gold fundamental analysis
Geopolitics increases the demand for gold and drives up prices. Monetary policy, on the contrary, gives the XAUUSD bears room to maneuver. Ukraine and the Fed are drawing attention to themselves, while the inability of gold to stay above $2,000 per ounce allows the physical asset market to become active. High prices undermine the desire of buyers in India and China to purchase precious metal, which ultimately leads to lower prices.
Not surprisingly, the FOMC’s hawkish outlook and even more hawkish Jerome Powell’s speech drove the gold price up a few days after the committee meeting. History has shown that the Fed’s monetary restriction is favorable for the precious metal. The reason lies in the depreciation of the US dollar due to the implementation of the principle of “buy on rumour, sell on the fact.” I remember when the Fed raised borrowing costs in 2015-2018. The gold fell prior to its meetings, and then rose after the release of FOMC results. Nowadays, XAU simply does not have enough impulse to enact the old scenario. The reason is that the Fed has not been so aggressive in a long time.
The rise of 10-year US Treasury bond yields to May 2019 level of 2.3% has two reasons. First, is the intention of the central bank to raise the rate to 2% in 2022 and 2.8% at the end of the monetary tightening cycle. Second, Jerome Powell’s statement about a possible rise in borrowing costs by 50 basis points at one of the upcoming FOMC meetings. Real debt rates also began to rise. This fact took away the main advantage of gold. The real return is the opportunity cost of owning gold. The higher it is, the more reason to enter XAUUSD sales.
Dynamics of gold and real treasury yield
Despite the armed conflict in Ukraine, investors do not buy US Treasury bonds, believing that the Fed will help the economy avoid a recession. However, there are factors over which the Fed has no control. Modern inflation is different from what it was before. Today, the acceleration of CPI is based on commodity prices, which are actively rising due to events in Eastern Europe.
The higher the oil price rises, the higher the inflation expectations. This holds back the rally in the real yield of US Treasury bonds and contributes to the gold stabilization. The longer the hostilities in Ukraine last, the higher the risks of recession and stagflation. These factors allow the precious metal to resist the most aggressive Fed since the 1980s and give reason to buy ETFs. Since the beginning of the war, the specialized ETF stocks funds have increased by 117 tons.
Dynamics of ETF gold holdings
Source: Financial Times.
Weekly gold trading plan
In my opinion, it’s time for gold to consolidate the price in the trading range of $1850-2000 per ounce. The impact of various factors allows to enter gold sales on the rise to $1950 and $1980-2000 and buy it on the decline when the price rebounds from the supports at $1885 and $1850.
Price chart of XAUUSD in real time mode
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