Everything that happens in the bond and forex market has a direct impact on gold. In the first quarter of 2021, the precious metal closed in the red zone for the first time since 2018 and plunged the worst since 2016. The US dollar and the yield on 10-year Treasuries, by contrast, showed the worst performance in 2016. All this indicated that gold's future depends on the greenback and bond yields.
Spot gold, quarterly percentage change
Five years ago, the Fed took a tough stance on monetary policy, which led to the strengthening of the greenback and an increase in Treasuries yields. Nowadays, the situation is the same, but reasons for it are fundamentally different. This time, a sell-off of bonds takes place and the US dollar index soars on expectations of strong economic growth in the United States in 2021. Joe Biden not only provided the economy with a large-scale fiscal stimulus package, but also promised that 90% of Americans will receive their COVID-19 vaccine shot by April 19, the end of his first 100 days in office,
The faster a collective immunity is developed, the quicker the US economy will open, the stronger the GDP growth will be. In its March forecast, the Fed said it expected the gross domestic product to expand by 6.5% in 2021. However, after the FOMC meeting, there have been a lot of rumors in the market about a $3 trillion relief package prepared by the Biden team. Democrats believe the initiative will get an approval in Congress. Therefore, the topic of reflation trade that pushes both the greenback and US Treasury yields up is far from being completely covered.
US 10-year Treasury yield, quarterly net change
In theory, considerable deferred demand should lead to a sharp rise in consumer prices. Gold is traditionally perceived as a hedging tool against inflation, that is, it can end up in a favorable environment. In fact, this is not the same inflation. It's one thing when the economy goes downhill, the currency falls rapidly, and people try to get rid of money even buying something they do not need. Another is when GDP is ready to show the best performance since 1983. If so, then who needs safe haven assets such as precious metals, the Japanese yen or the Swiss franc during rapid economic growth?
It seems that the Fed will be concerned about the yield on 10-year bonds only when it rises up to 2.5%. This will increase the risks of QE expansion or shifting to targeting yields. However, where will XAU/USD be by that time?
According to the daily chart, the target is seen at the 161.8% retracement level of 1645. You should keep those of your short positions that were opened on a rebound from resistance at 1755 and on a breakout of support at 1710. Bearish sentiment will remain until the price is below 1755.
GOLD, daily chart
