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Gold has returned to its roots. After the geopolitical risk premium disappeared from the price of the precious metal, it once again sensitively reacts to the Federal Reserve's monetary policy. The slowdown in U.S. inflation is perceived by investors as a signal of the end of the federal funds rate hike cycle, which means it's time to think about a rate cut. Excellent news for XAU/USD.
Gold surged above the $2000 per ounce mark due to an armed conflict in the Middle East. It disregarded the dynamics of Treasury bond yields and the U.S. dollar. However, as soon as it became clear that the hostilities were unlikely to extend beyond Israel and the involvement of other states was not expected, interest in the precious metal sharply diminished. Its almost 11% rally indicated active use as a geopolitical risk hedging tool. In November, the need for this sharply decreased, and XAU/USD quotes went down.
Gold has practically returned to the levels from which it started when Hamas carried out terrorist attacks on Israel in early October. Once this happened, old drivers—Treasury bond yields and the U.S. dollar—came into play. All these instruments are sensitive to the monetary policy of the Federal Reserve. And after the release of data on U.S. inflation for October, the markets are awaiting a dovish pivot from the central bank.
Gold and U.S. Dollar Dynamics
Perhaps some were alarmed by Federal Reserve Chairman Jerome Powell's statement that the Fed may raise rates if necessary, but not gold. In fact, the hawkish rhetoric of FOMC officials is a forced measure. If they do not maintain intrigue, the markets will start increasing the probability of monetary expansion in 2024. As a result, financial conditions will become more relaxed, and the fight against inflation will become more challenging.
However, no matter how much the Fed representatives say, the decisions of the central bank depend on the data. The facts that basic inflation in the U.S. did not increase on a monthly basis for the first time since July 2022 and continued to slow on an annual basis seriously weakened the U.S. dollar. The futures market signals two 25 bps rate cuts in federal funds by July 2024, although until the important release, only one act of monetary restriction was weighing.
Gold is an anti-dollar, so the worst daily dynamics of the USD index in a year pushed XAU/USD quotes up. Simultaneously, the price of the precious metal is determined by the cost of money. Therefore, the decline in Treasury bond yields has given additional impetus to bullish attacks on gold. JP Morgan predicts that the interest rate on 10-year U.S. government bonds will fall to 3.95% by 2024. If this happens, the precious metal will be able to return above $2000 per ounce and consolidate there.
Technically, gold's return above moving averages indicates the "bulls" taking the initiative. We are looking for buying opportunities. The reason to open long positions will be successful assaults on resistance levels at $1976, $1981, and $1990 per ounce.
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