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Good US macroeconomic reports, as well as rising demand for safe-haven assets due to the aggravating situation with the coronavirus worldwide, gave strong impetus for growth to the US dollar. As a result, gold plunged into a wave of sales, and, for the first time in 1.5 months, fell below $ 1,900 per ounce. In addition, TD Securities said that speculative positions in precious metals are stretched, thus, a correction is plausible. However, it will not be deep and long-lasting.
Anyhow, since gold is quoted in US dollars, these assets usually go in opposite directions. The main drivers of bearish mood in the dollar were the rapid recovery of the European economy compared to the US and the ultra-soft monetary policy of the Federal Reserve. When the Fed switched to a policy that focuses on inflation, the US dollar should have weakened even more, since such a strategy assumes a long-term holding of inflation rate at a level of 0-0.25%. However, the recent statement of Chicago Fed President Charles Evans, which noted that the rate could be raised before the average inflation reaches 2%, caused quite a stir in the market, contributing to a sharp growth in the USD index.
Dynamics of gold and US dollar:
Nevertheless, bulls still hope for another gold rally, especially since Commerzbank said that during the XAU / USD peak on September 21, ETF stocks rose 36 tonnes, the largest daily inflow in 2020. Many investors believe that the correction will be shallow, and that the upward trend will resume soon.
In line with this, TD Securities are convinced that the current improvement in the US economy is just temporary, largely because growth was driven by massive fiscal stimulus. Since Republicans and Democrats still cannot agree on additional aid, GDP recovery will slow and the risks of a double recession will rise, which will be very good news for gold.
In addition, the upcoming presidential election in the United States will attract bulls on XAU / USD. Citi believes that demand for the asset will rise ahead of the US presidential election, and, if coupled with low rates in the US debt market, gold will be able to renew its all-time highs before the end of 2020.
Another factor that should be considered is the situation with coronavirus. A rise in mortality will increase the risks of repeated lockdowns and a slowdown in the European economy. In such a case, large-scale sales of EUR / USD will continue, and it will strengthen further the US dollar, and accordingly, push the XAU / USD quotes down.
Gold, daily chart:
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