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The rise of gold to the area of 5-month highs forced investors to puzzle over the question: what was it? Accelerating inflation was bad news for the precious metal throughout the year, but the acceleration of US consumer prices to 6.2% YoY in October pushed its quotes up by $40 per ounce per day. The XAUUSD bulls argue that this is a shift in thinking. If until November investors believed in the Fed's mantra about the temporary nature of high inflation, now they are beginning to doubt it.
High prices are serious and for a long time. If the Fed continues to play the "patience for CPI acceleration" game, it risks losing control of inflation, and in such an environment, gold feels like a fish in water. It also plays into the hands of a narrowing yield spread between 10- and 2-year US Treasury bonds against the backdrop of the growing likelihood of tightening monetary policy and the associated economic slowdown. The inversion of the yield curve is a signal of an impending recession and good news for the precious metal, which is usually popular as a safe-haven during economic downturns.
It should be noted that accelerating inflation is a global trend, with different central banks approaching it differently. An overwhelming rush to tighten monetary policy is fraught with stagflation, a combination of high prices, and slow GDP growth. And in this situation, gold can benefit.
Inflation dynamics in the USA, Eurozone, and Britain
The precious metal is supported by the drop in the real yield of US Treasury bonds to the area of the historic bottom, as well as fears that further acceleration of CPI will hit corporate profits and contribute to the correction of the US and world stock indices. All these factors explain the recent rise in XAUUSD and the fact that speculative net longs on the analyzed asset have reached their highest levels in the last 10 months.
At the same time, there are many paradoxes on the market. Despite the meteoric rise in gold futures, stocks of specialized exchange-traded funds are not going to increase. In addition, the fact that the precious metal and the US dollar are currently moving in the same direction, upside, is surprising. Ultimately, gold is quoted in the US currency and should fall when the USD index rises. There is a widespread perception in the market that a strong dollar will limit the potential for an upward trend in XAUUSD. In my opinion, it will deploy it.
Gold wins back the Fed's passivity factor, but this passivity cannot continue indefinitely. The central bank has spent a long time preparing investors to taper QE, I do not think they will be intimidated by an earlier exit from the program than is currently expected. And then the rate hike is just a stone's throw away.
Technically, the implementation of gold's targets on the "Wolfe Wave" pattern, which is located at the intersection of prices and the 1-4 line, increases the risks of a pullback. A breakout of the pivot level at $1,850 per ounce with a close below it is a reason to sell the analyzed asset in the direction of at least $1,820 and $1,790.
Gold, Daily chart
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