Unprecedented demand for the US dollar and soaring bond yields make a perfect storm for the XAUUSD. Panicky gold traders are fleeing the market, and the prices have dropped to their 11-month trough. What’s next? Let’s discuss it and make a trading plan.
Monthly fundamental forecast for gold
Don’t play against the Fed. Historically, tightening monetary policy would create an unfavorable environment for gold where it falls more often than grows. Much depends on how fast rates are raised. The Fed is in a decisive mood at the moment. They took into consideration the mistakes of the 1970 stop-go policy when borrowing costs rose, subject to the economic situation. Gold has no chance in such circumstances. The target of $1,700 per ounce for short positions is reached, but the bears move further.
Gold is heading to its fifth consecutive weekly closure in the red, the worst result in the past four years. Hedge funds reduced net longs in gold to the lowest level since 2019. The outflows from the ETFs in June reached $1.7 billion after $3.1 billion in outflows in May. Gold traders and speculators are fleeing the market in panic, fearing the Fed’s firmness that strengthens the US dollar. The USD index has not been that high in the past few decades. At the same time, Bank of America asserts the greenback will continue growing until the end of the year. Citigroup calls such a demand for the USD “unprecedented,” while Goldman Sachs recommends buying the greenback against developing currencies.
Gold and the USD
The growth of consumer inflation and consumer prices to 9.1% and 11.2% in June only fuels the fire. Before the data was published, the derivatives market was 100% sure the federal funds rate would increase by 75 basis points at FOMC’s meeting in July. Now CME’s derivatives point to an 81% probability that borrowing costs will rise by 100 basis points. Can the USD not grow and the gold — not fall in these circumstances?
The Fed may even take another step to confirm its readiness to fight inflation. Even if the central bank is aware of lower commodity prices and inflation expectations, it has to reduce CPI and PCE. Moreover, they cannot claim a victory over high prices as long as the labor market remains rigid and wages continue growing as fast as now.
Another “headwind” for the XAUUSD is a decrease in inflation expectations as US bond yields have resumed rising. In such circumstances rise the bond market’s real rates, while gold cannot compete with them as it does not yield interest.
US inflation expectations
Monthly trading plan for gold
A strong American dollar and growing real bond yields knocked gold bulls off their feet. Thus, the precious metal found itself in the wrong place at the wrong time. As long as gold quotes trade below $1,725 per ounce, selling should be in priority. If resistance is broken, open shorts on breakouts from $1,750-1,755. The levels of $1,650 and $1,600 per ounce are bearish targets.
Price chart of XAUUSD in real time mode
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