08.03.202311:40 Forex Analysis & Reviews: Gold punished but not defeated

Gold was punished for trying to grow on an unfavorable external background. A week earlier, I noted that falling stocks, skyrocketing Treasury yields, and a resurgent U.S. dollar are creating headwinds for the precious metal. Its rally is an anomaly, and investors will soon be able to see this. Thus, XAUUSD quotes collapsed to the area of two-month lows, and we successfully entered the shorts from the level of 1,850.

No doubt, the active buying of gold by central banks is bullish for gold. In 2022, they hit 1,136 tonnes, the highest since 1950. In February, the People's Bank of China increased gold reserves for the fourth month in a row, and Morgan Stanley predicts an increased demand for the precious metal by the jewelry industry on the background of a rapid economic recovery in China in 2023. If we add the armed conflict in Ukraine and heightened risks of the flight of unfriendly Western countries from U.S. dollars, which according to Fireside Investments, will get XAUUSD to 2,400, the upward trend may recover. In fact, you have to consider the macroeconomic background first and foremost.

Gold is sensitive to the Fed's monetary policy, as it is the Fed that is fighting inflation. It is the American central bank that sets the pace for the stock, bond and currency markets. And Jerome Powell's statement to the Senate that the federal funds rate will be higher than the FOMC expected in December due to stronger statistics was the catalyst for the collapse of XAUUSD. Treasury yields are back above 4%, stocks are down, and the U.S. dollar has soared to its highest level since the beginning of the year.

Dynamics of Gold and U.S. Treasury yields

The precious metal was forced to retreat as the futures market gives more chances for a 50 bps increase in the federal funds rate than 25 bps in March. And who knows, the Fed may have to widen the step even further. Up to 75 bps if U.S. employment and inflation statistics turn out to be stronger than Bloomberg experts expect. Derivatives forecast an increase in the cost of borrowings to 5.6% by October and a slight decrease to 5.5% by the end of the year. Back in early February, these figures were 4.9% and 4.4%. How things have changed in one month!

However, no one can guarantee that everything will not turn upside down again after the U.S. labor market report for February. The return of employment to its previous growth rate of about 200,000+, an increase in unemployment, and a slowdown in average wages are the key to changing the wind. Towards a weaker dollar, declining bond yields and a rising S&P 500. So much is at stake, so the precious metal is not going to give up just yet.

Technically, if gold fails to overcome the support at $1806 an ounce within the next couple of days, it makes sense to take profit on the shorts formed at $1,850 and think about buying if the price returns to the fair value range of $1,824–$1,882.