Gold's attempts to penetrate the lower limit of the $1820–1860 per ounce consolidation range are facing strong resistance from the bulls. The precious metal is trading in tug-of-war mode. Its status as a hedge against inflationary and stagflationary risks in the face of an approaching recession counteracts the Fed's rate hike factor. It is believed that the growing profitability of the global debt market increases the costs of owning the analyzed asset.
Indeed, as US Treasury rates rise, there is an outflow of capital from gold-focused ETFs. The largest specialized exchange-traded fund, SPDR Gold Shares, is facing a fifth consecutive trading session of destocking. This circumstance keeps XAUUSD quotes under pressure.
Dynamics of gold prices and capital flows in ETFs
The reduction in investment demand, coupled with a drop in Chinese consumer interest in jewelry due to lockdowns in China that have taken place over the past few weeks, a strong dollar, and an excessive increase in the federal funds rate by the Fed are clear headwinds for the precious metal.
Nevertheless, it cannot be said that the bulls in XAUUSD do not have trump cards. Fears that the Fed and other central banks will push the global economy into recession with aggressive monetary tightening are supporting buyers. Gold is beginning to be perceived as a kind of indicator of the efficiency of regulators. If it trades above $1800 an ounce, investors continue to believe that a downturn in the US and the global economy is coming. If it falls below a psychologically important mark, the issue of a soft landing appears on the agenda.
At the same time, judging by the increase in the forecast for the precious metal at the end of 2022 to $2500 per ounce by Goldman Sachs, the reputable bank is fully confident that the US will face a recession even before the end of this year.
Structure of world gold production
Theoretically, XAUUSD bulls should have been supported by information about the introduction of a ban on the import of gold from the Russian Federation by the G7 countries. Russia is the second-largest producer of the precious metal in the world after China. According to UN Comtrade, 28% of UK gold imports in 2021 were linked to the Russian Federation. Note that London is the largest center through which the paths of the precious metal pass.
In fact, the gold market is fundamentally different from its oil counterpart. Prices on the latter are formed based on supply and demand for a physical asset, while XAUUSD quotes dance to the tune of the Fed and global demand for risk. In this regard, it becomes understandable why investors ignored the news about the ban on Russian gold imports.
Technically, only a break of support at $1805 per ounce will allow the Broadening Wedge pattern to work out and become the basis for opening shorts. Until then, gold will continue to trade in consolidation.