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Fitch downgraded the U.S. credit rating to AA+ from AAA due to governance erosion over the past two decades. This is evident in the repeated confrontations between Democrats and Republicans over debt limits and last-minute resolutions. The organization expects a recession in the American economy around 2023–2024 and predicts an increase in the budget deficit from 3.7% in the past to 6.3% this year. If back in 2011, precious metal soared when S&P downgraded the rating, this time it barely flinched. What has changed?
In those days, instead of getting rid of Treasury bonds, investors actively bought them up. As a result, yields plummeted, dragging the U.S. dollar down to the bottom. In August 2023, the markets were not shaken because Fitch had already warned of the possible downgrade back in March. Moreover, the drama with the debt ceiling remained in the past, and it is unlikley that the debt market rates will fall. On the contrary, the massive $1 trillion issuance of Treasury bonds in the third quarter and the weakened yield curve control by the Bank of Japan increase the risks of rising rates and strengthening the American dollar. In such an unfavorable environment, "bulls" on XAU/USD are unlikely to please their supporters.
The surprise from Kazuo Ueda and his colleagues struck the global debt market. In just three days, the volume of bonds with negative yields decreased by $600 billion. At the end of 2020, it reached a record $18.4 trillion. And that's when gold shone.
Dynamics of bonds with negative yields
The World Gold Council report on the physical asset market does not add optimism to the precious metal. Net purchases by central banks fell 64% to 103 tonnes, the lowest level in more than a year. Turkey should be blamed, which sold 132 tonnes to obtain resources to support the lira. The outflow of capital from the ETF amounted to 21 tonnes, with the worst situation in June.
According to WGC data, gold demand in India will fall to 650–750 tonnes in 2023, the lowest level since 2020. For comparison, Indians purchased 774 tonnes last year. The country is the largest consumer of the precious metal along with China.
Dynamics of gold demand in India
The markets underestimate the factor of the Federal Reserve's readiness to maintain the federal funds rate at a plateau for an extended period. As long as macro statistics in the United States do not significantly deteriorate, the central bank will be cautious. It does not want to make the same mistake as its predecessors—declaring victory over inflation prematurely. This circumstance plays into the hands of the U.S. dollar and carries a negative impact for XAU/USD.
Technically, on the gold daily chart, there is exhaustion of the correlation movement towards the downward trend, as confirmed by the formation of the 1-2-3 pattern. As long as the quotes remain below the fair value of $1960 per ounce, it is advisable to sell the precious metal towards $1931 and $1915.
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