The more money there is in the financial system, the more likely it is that gold will get a place in investment portfolios. That is why, against the background of the crazy Fed, which stunned the markets with the colossal scale of monetary expansion, the precious metal managed to reach historical highs in August 2020. And the tapering of QE in 2013, made it move to a downward trend. There are a lot of similarities between current events and the events of 8 years ago. Should we be surprised by the drop in XAU/USD quotes?
The world economy is cyclical. Recessions are followed by recoveries. To keep it from overheating, central banks are tightening monetary policy, which is a serious blow for gold. Especially when the Fed begins to engage in normalization. The 4-week rally of the precious metal should not be considered an attempt to return to an upward trend. In fact, the analyzed asset is simply clutching at straws in the form of the following scheme: the spread of the COVID-19 delta variant, the slowdown in the global economy, and the refusal of central banks led by the Federal Reserve from curtailing monetary incentives. Unfortunately for the "bulls" on XAU/USD, the higher the S&P 500 rises, the less likely it is to be implemented.
According to Oxford Economics, the Delta variant can slow down the American economy only if the spread of the virus across the US becomes uncontrolled. It is unlikely that the doctors will allow this. Effective vaccination helps them – almost half of the US population received both doses of vaccinations. At the same time, huge fiscal incentives, the desire of people to spend money on things and services that were inaccessible to them during the previous 18 months, as well as the recovery of the labor market will contribute to further growth of American GDP. In the second quarter, according to the company's research, it may reach 9%, which will be the best dynamics since the 1980s.
If we take such optimistic forecasts on faith, there will be a desire to buy stocks and sell bonds. The rally in the yield of the latter is disastrous for gold.
Dynamics of gold and US bond yields
But in the arsenal of "bears" on XAU/USD, there is also a strong dollar, which is currently wandering near 3-month highs. Some prefer to buy it because of American exclusivity - the outpacing growth rates of the US economy over its global counterparts, because of the status of a safe haven asset in times of market turmoil, and because the Fed intends to normalize monetary policy earlier than investors expected from the Central Bank.
The US dollar does not have many competitors today, which, coupled with the high probability that the yield of Treasury bonds has found the bottom and will only continue to rise, puts serious pressure on the bulls on XAU/USD.
Technically, events are developing within the framework of the previously announced scenario: there is a rollback in the direction of 50% Fibonacci from the CD wave of the Gartley pattern. We used the growth of gold quotes to $1,830 with their subsequent return to $1,815 per ounce for sales. Now we are holding shorts with a target of at least $1,715, and we are increasing them on pullbacks.
Gold, Daily chart