If 2020 was the best year for gold in 10 years, then the start of 2021 was the worst in almost four decades. Since the beginning of January, the precious metal has lost about 10% of its value, and only the stabilization of the situation in the US Treasury bond market allowed it to return above $1,700 per ounce. A strong dollar and rising yields create a powerful headwind for XAU/USD, and the bulls are not yet able to cope with its gusts.
Even though the blue wave in the United States caused an attack of reflationary trading, gold, which is traditionally perceived as a hedge against inflation, is experiencing serious difficulties. First, the recent rise in US debt market rates was associated with an increase in real yields, which is bad news for the precious metal. Secondly, it has serious competitors - bitcoin and other cryptocurrencies, which it knows, with the help of which it is also allegedly possible to insure the risks of rising consumer prices.
Let's not forget that holding low-interest currencies like the Japanese yen, Swiss franc, or non-interest bearing gold during a booming global economic recovery is more expensive. According to OECD forecasts, global GDP will expand by 5.6% in 2021, and the US economy by 6.5%, which will be the best result for the United States since 1984. The combination of large-scale vaccinations and the hope of a quick return of the global economy to the trend is forcing speculators and ETF holders to throw gold off their hands. Hedge funds have reduced their net longs to their lowest level since May 2019, and stocks of specialized exchange-traded funds have declined significantly in 2021.
Dynamics of ETF stocks and speculative positions in gold
Changes in the precious metal market are pushing large banks and investment companies, including Goldman Sachs and UBS, to adjust their forecasts downward. Merrill Lynch, who had set an ambitious estimate of $3,000 per ounce for BofA, was forced to abandon it.
To be sure, there are still plenty of bulls on the market pointing fingers at the growing interest in a physical asset in India, where jewelry demand has rebounded from more than 10-year lows, and in China, where gold is trading at a premium to London, although in 2020 it was the opposite. In my opinion, these are weak arguments. Due to the high share of investment demand in the aggregate, the precious metal is a speculative instrument that reacts little to the physical asset market, unlike, for example, oil. In 2013-2015, when XAU/USD quotes were falling steadily, demand in Asia was also off the scale, and ETF stocks were declining.
Technically, a rebound from the important $1,675-1,685 per ounce area identified by pivot levels allowed gold to recover. Nevertheless, the market situation continues to be controlled by the bears, so the rebound from the resistance at $1,730, $1,745, and $1,775 should be used to form shorts with targets at 161.8% and 200% on AB=CD. Only the growth of quotes above $1,800 can change the alignment of forces, which will allow us to talk about the activation of the Wolfe Waves reversal pattern.
Gold, daily chart
