February was the worst month for gold since 2016. According to its results, the precious metal lost about 6% of its value amid a reduction in speculative long positions, capital outflows from ETFs, and rising Treasury bond yields. Non-interest-bearing gold cannot compete with debt obligations, while interest rates on them are rapidly rising. At the same time, the costs of holders of specialized exchange-traded funds' products increase, and investors get rid of them.
As global GDP recovers from the recession, interest in safe-haven assets is fading. And the rise in US Treasury yields can be seen as a sign of economic optimism. According to Commerzbank, the precious metal's reputation has been badly tarnished by the heavy losses faced by ETFs in the past few weeks. During March 1 trading, their stocks decreased by 14 tons, which is the largest daily outflow in 2021.
Trends in Capital Flows to Gold-Focused ETFs
Gold slipped about 18% from its all-time highs in August and slid to an 8-month low in early spring. Hedge funds are cutting long positions, and Citigroup believes the precious metal is facing increased competition from cryptocurrencies, whose leader, Bitcoin, is up 55% this year.
What can save the bulls on XAU/USD? The strongest trump card will be a change in the Fed's rhetoric. So far, the Fed has not been too concerned about rising bond yields. FOMC officials attributed it to a belief in a booming U.S. economic recovery and hopes for Congress to pass a $1.9 trillion fiscal stimulus from Joe Biden. However, as soon as Lael Brainard spoke about concerns about the negative impact of rising debt rates on financial conditions, the USD index fell and bond yields stabilized. This allowed gold to recover.
In my opinion, it is possible to reverse the downward trend in XAU/USD only under one condition - if the Fed talks about switching to a yield targeting policy, similar to the Bank of Japan and the Reserve Bank of Australia. This seems unlikely, so the idea of gold returning above $1,900, let alone $2,000 an ounce, needs to say goodbye. Most likely, we will not see these marks until the next global economic crisis.
It makes sense to sell the precious metal if strong data on business activity and the US labor market lead to an increase in debt market rates and a strengthening of the dollar. On the contrary, if this does not happen, XAU/USD will enter the consolidation range of $1,700-$1,830.
Technically, the growth of gold quotes above $1,775 and $1,815 will allow us to talk about the activation of the Wolf Wave pattern and will be a signal for short-term purchases. While the precious metal is below these levels, the situation on the market is controlled by the bears. I recommend holding the shorts formed on the breakout of support at $1,775 and increasing them periodically. The target of the downward movement is the mark of $1,645 per ounce, which is located at 161.8% on the AB=CD pattern.
Gold, daily chart