It would seem, who needs such a safe haven asset as gold during the period of rapid global economic growth? The IMF raised its forecast for global GDP for 2021 to 6%, the highest level in four decades, and XAU/USD quotes rose to a 2-week peak. If they break the important mark of $1,750 an ounce, the precious metal rally risks accelerating. And this has its own explanations.
As long as central banks remain peaceful, gold has a good chance of moving upward. There is a growing opinion in the markets that the Fed will allow the US economy to overheat, which is fraught with not a temporary, but a long-lasting jump in inflation, and the precious metal is the instrument used for combating which for centuries. Let the futures contracts expect the federal funds rate to rise at the end of 2022 and its growth to 1.25% by the beginning of 2024. Jerome Powell and his colleagues did not give grounds for such "hawkish" forecasts. Moreover, the head of the Federal Reserve Bank of Cleveland Loretta Mester said that despite the strong data on the US labor market in March, the Fed will remain patient.
Expectations of a rapid recovery, and then overheating of the American economy, as well as the passivity of the Fed, allow gold to go along the same road with US stock indices. Their positive correlation is growing by leaps and bounds, and the renewal of the S&P 500 to all-time highs in April inspired the XAU/USD bulls to feats.
Gold and S&P 500 correlation dynamics
The mid-spring is fundamentally different from its beginning, when a rally in Treasury yields held back buyers of technology stocks and served the US dollar faithfully. In March, the US debt market plunged into its worst sell-off in decades, and the USD index solidly strengthened, which forced fans of ETF products to flee the battlefield, and speculators to cut net longs on precious metals. It is not for nothing that stocks of specialized exchange-traded funds have dropped to the very bottom since May, and net long positions to a 3-week low.
In April, the situation changed radically. The fall in US Treasury yields in response to strong US employment and business data proves that the market has realized its mistake. It ran ahead of itself for a long time. It's time to calm down. Consolidation of debt rates allowed tech stocks to raise their heads, and the S&P 500 to rewrite all-time highs, which played into the hands of the XAU/USD bulls.
What's next? The more the market believes in the Fed's intention to sit on the sidelines for a long time, the higher the risk of rising gold. In this regard, the publication of the minutes of the March meeting of the FOMC may become another catalyst for the precious metal rally. At the same time, the main adversary of the US dollar in the face of the euro is still vulnerable, so I would not rush to form longs on XAU/USD before successfully overcoming resistance at $1,750 per ounce.
Technically, the presence of "Double Bottom" and "Wolfe Wave" patterns on gold's daily chart signals the intention of the "bulls" to launch a counterattack. A breakout of resistance at $1,750-$1,755 will be a reason to open long positions with targets at $1,835 and $1,870 per ounce.
Gold, Daily chart