Will the US economy live through an aggressive rate hike? Is high inflation here to stay? Gold’s fate depends on these issues. Let’s discuss them and make a trading plan.
Monthly fundamental forecast for gold
Marching against the crowd is like trying to stop a high-speed tram: it’s painful and useless. The crowd expects that the US treasury yield and the USD will continue to rally. A decline in response to Jerome Powell’s statement that considering a 75-point rate hike is no longer relevant looks delusive. If so, gold is in an unpleasant situation. The sellers went short at attractive levels amid a rise of over $1,900 per ounce.
Everything, from stocks to precious metals, grew in the epoch of negative real interest rates amid the Fed’s ultra soft policy and large flows of cheap liquidity. Today, the central bank intends to bring the federal funds rate to a neutral level as soon as possible. Consequently, the 10-year bond yield has grown above 3%, real bond rates have moved to a positive area, and the XAUUSD quotes have fallen.
The situation is worsening as the US dollar is strong: its index is near the 20-year high and does not seem to be lower soon. At the same time, Janet Yellen is not worried about the dollar’s strong position, believing in the greenback’s market value. According to Yellen, the dollar’s strength reflects how monetary policy works: when the Fed raises rates, investors put money in high-yield stocks. The Fed is also interested in the dollar’s strength because it can help slow down inflation easier.
Gold and USD index dynamics
Sales in the US stock market put pressure on gold. Investors are selling other assets to maintain their positions in securities. At the same time, stock indexes are falling on fears that the Fed may go too far and the US economy will not avoid recession amid aggressive monetary policy tightening. The war in Ukraine and an outbreak of COVID-19 in China, the largest since the pandemic’s start, also fuel the fire and may slow down European and Chinese GDP. All these factors could support gold, but things are not that simple.
The global and US economies are currently less sensitive to rate hikes as household balance sheets grew strong amid huge fiscal stimuli. Banks feel good, too. So, Janet Yellen can state that the US economy will continue steadily growing in 2023 and avoid recession. However, the Fed should be lucky and act smart.
Monthly trading plan for gold
If the economy is strong and less sensitive to monetary restrictions, the Fed will easily raise the federal funds rate to 3.5% or higher. The bond yield and USD risk growing even more. That will put pressure on gold and allow us to sell it with targets of $1,805 and $1,785 per ounce.
Price chart of XAUUSD in real time mode
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