XAUUSD prices were unable to drop more than 20% from the levels of August record highs and move to the bear market. What will this mean for gold? Let us analyze the gold outlook and make up a trading plan.
Monthly gold fundamental forecast
Even though the first quarter for gold was the worst since 2016, and its price reached the target of $1,675 per ounce set in the previous article, my attitude towards the precious metal is changing. Over the past four weeks, I have recommended traders to focus on selling XAUUSD. Now the inability of traders to lower prices into the bear market zone, which required a 20% decline in prices from the levels of record highs, indicates their weakness. It also makes us look at the prospects of XAUUSD in a different way.
The worst quarter for gold since 2016 was driven by the fastest sell-off in the US Treasury market in decades. Debt market rates rose sharply on strong US economic growth expectations, massive fiscal stimulus, and rapid vaccination rates. At such times, the precious metal cannot compete with interest-bearing assets, especially since the rise in the cost of borrowing increased the costs of storing gold in ETFs.
Dynamics of Barclays US bond index
Source: Bloomberg.
Gold traditionally shows increased sensitivity to the rates of the debt market. However, since August, Treasuries' real yield has grown more slowly than the XAUUSD prices fell. This suggests that the precious metal is somewhat oversold. In my opinion, the fact that investors and speculators want quickly get rid of ETF products and futures, respectively, is the reason. Holdings of specialized exchange-traded funds fell to their lowest level since May, while net longs fell to a 3-week bottom.
Dynamics of gold and real US bond yields
Source: Bloomberg.
Dynamics of gold and SPDR Gold Shares' reserves
Source: Bloomberg.
In March, gold traders believed in the idea of a faster start of the normalization of monetary policy than the Fed was trying to introduce. If so, then the comments of Loretta Mester, one of the FOMC's main "hawks", that the Fed, despite the impressive statistics on US PMI for March, will continue to be patient, came as a surprise to the XAUUSD bears.
The gold situation can develop in three ways. If the central bank does start raising rates before 2023, the gold will enter the bear market territory and get stuck there for several years. If Jerome Powell and his colleagues intend to remain passive for at least 2-2.5 years, the current gold fall looks excessive. Finally, if, due to a disruption in the supply chain and off-scale demand, the rise in inflation turns out to be not temporary but long-lasting, XAUUSD prices will rise.
Monthly gold trading plan
The factor of loss of investor interest in the US dollar plays an important role in changing my gold outlook. April for the greenback, most likely, will not be as successful as March. The stabilization of the debt market and the eurozone's economic recovery will worsen the position of the USD index bulls and play into the hands of XAUUSD bulls. However, I would not rush with entering long trades. Only the growth of gold price above $1750-1755 per ounce will make it possible to suggest the beginning of the gold uptrend.
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