11.07.201900:42 Forex Analysis & Reviews: Gold is dancing to the music of central banks

Profit taking on long speculative positions after the release of strong statistics on the US labor market in June gave gold the second worst day in 2019. Futures quotes slumped by 1.6%. This is slightly better than -1.8% on the first day of July on the information that Donald Trump was able to negotiate with Xi Jinping to resume the Washington-Beijing trade negotiations. In general, in the current year, the precious metal lost 1% or more of its value per day by only six times, and its market conditions, despite the retreat at the end of the first half of summer, remain bullish.

Over the last month, according to Commerzbank's estimates, the stocks of specialized exchange funds (ETF) increased by 110 tons, and speculators increased net long positions in gold by six times. The persistence of geopolitical tensions, protectionism and a slowdown in the global economy force the central banks to diversify reserves in favor of the precious metal. In 2018, their reserves expanded by 651.5 tons (+ 74% y/y), from January to May 2019 - by 73% y/y. If Russia and China will increase their purchases of gold at the same pace as last year, the total amount of reserves of regulators, according to Citigroup, may increase by 700 tons. In June, the People's Bank of China purchased another 10.3 tons, increasing gold reserves by 84.3 tons in seven months.

Dynamics of China's gold reserves and Russia

The current situation in monetary policy has a lot in common since 2011, when the leading central banks of the world actively used incentive programs in the fight against the global economic crisis. In particular, rumors that the US QE will provoke hyperinflation pushed XAU/USD quotes to record highs. It has now become clear that the asset purchase program is not as dangerous as previously thought. Inflation did not accelerate to 50%; nevertheless, the fact that $13 trillion of debt obligations are traded with negative returns due to ultra-soft monetary policy provides serious support to the precious metal. In addition, it traditionally sensitively reacts to the growth of the US budget deficit. In 2009-2011 it exceeded 10% of GDP and, according to estimates of the Congressional Budget Office, in 2049 it will more than double compared with current values up to 8.7% of GDP.

UBS predicts that gold will rise to $1,450 by the end of 2019, and to $1,500 per ounce by the end of 2020, amid a weaker US dollar and lower US bond market rates. In the short run, speeches by Jerome Powell in front of the House of Representatives and the Senate can influence its dynamics. The Fed chairman can both refute and ratify the idea of a futures market to lower the federal funds rate in July.

Technically, as long as the quotes of the precious metal are above $1,372 and $1,352 per ounce (38.2% and 50% of the CD wave of the AB = CD pattern), bulls continue to control the situation. Updating the June highs activates AB = CD with targets of 161.8% and 200%. The first of them corresponds to the mark of $1475, the second - $1490.