FX.co ★ Gold threw a red rag to the bulls

Looking at the rapid rally of XAU/USD to the highest levels since February, gold fans can proudly declare: "What we wanted to prove." The escalation of the US-Chinese trade conflict, the rising volatility of financial markets and the chances of lowering the federal funds rate, as well as fears for the fate of the US and world economy created a favorable environment for the precious metal, which it was in no hurry to use. The threat of a 5% tariff on all Mexican imports became the straw that broke the camel's back.

According to the World Bank's estimates, the world economy will expand by 2.6% in 2019, not 2.9% as expected in January. The conflict between the United States and China will have a detrimental effect on international trade, business activity and investment. If it is not resolved, then in 2019 instead of the expected + 2.7%, global GDP will grow by 1.7%. The US yield curve has inverted, signaling a quick recession. According to JP Morgan, the chances of a decline in the next 12 months increased from 25% to 40%. Against this background, the Fed is beginning to seriously talk about the need to reduce interest rates. St. Louis Federal Reserve President James Bullard believes that the time for easing monetary policy has already come, and Fed Chairman Jerome Powell says that the central bank will react to the deteriorating health of the US economy, which trade wars have a negative impact on.

The dovish rhetoric of FOMC officials and the increased likelihood of a reduction in the federal funds rate at the September meeting of the regulator from 32% in early May to 86% are bullish factors for gold. On the first day of June, the largest specialized exchange fund SPDR Gold Shares marked the best influx since July 2016 (at that time the markets were shocked by Britain's desire to part with the EU), and XAU/USD soared sharply.

Dynamics of capital flows in SPDR Gold Shares

Donald Trump's intention to impose tariffs on Mexican exports has become a red rag for gold bulls. Oxford Economics estimates that 25% of the duties will be deducted from the US GDP by 0.7 percentage points. at 2019-2020. Yield of treasury bonds continued to fall to the lowest marks from 2017, finally pulling the US dollar behind them into the abyss. I would venture to suggest that it was the stability of the USD index which held back the offensive fervor of precious metal fans.

What's next? Stock market volatility will remain high, which is good news for gold. Stock indices will continue to rush between deteriorating macroeconomic statistics for the United States, trade wars and the Fed's desire to lower the federal funds rate.

The growth potential of XAU/USD is enormous: speculators' net longs account for only 27% of the highest levels in the history of 37.2 million ounces. To restrain the offensive fervor of the "bulls" there is only the US dollar, which is unlikely to surrender without a fight.

Technically, the precious metal easily executed the first target of the "Wolfe Waves" pattern and continues to rally towards the next target for $1,350-1,355 per ounce.