The acceleration of US consumer prices to 2.6% and core inflation to 1.6% in March brought gold closer to the key resistance at $1,750. Treasury yields fell and the US dollar weakened, signaling that markets have finally come to believe in the Fed's readiness to endure inflation acceleration to 3-3.5%. Ultra-loose monetary policy has faithfully served the precious metal in 2020, why shouldn't the XAU/USD bulls take advantage of it in 2021?
Since the beginning of the year, gold has lost about 8% of its value amid growth in the USD index and rates on US debt, as well as due to a decrease in ETF reserves by 9% in physical terms. In March alone, investments in specialized exchange-traded funds fell by 108 tons, which is equivalent to $6 billion. Part of the money from the precious metal market flows into cryptocurrencies, which is confirmed by the dynamics of stocks of Bitcoin-oriented funds.
Dynamics of gold and Bitcoin stocks in funds
There is a growing consensus in the market that the leader of the cryptocurrency sector is replacing gold as a hedging tool against inflation. It is being bought as distrust of traditional fiat currencies grows. The same thing happened earlier with precious metals.
At the same time, if ETF stocks are decreasing, then the demand for gold in Asia, on the contrary, is growing. In March, Indian imports of precious metals jumped from 13 tons to 98.6 tons. This is the highest figure since May 2019. By the end of the first quarter, purchases reached almost 190 tons, which is twice as much as a year earlier. The withdrawal of the analyzed asset from the warehouses of the Shanghai Gold Exchange in March increased to 168 tons, which doubles the figure for the same period in 2020. Usually, the outflow of gold from the exchange is used to replenish the stocks of jewelers and indicates high domestic demand. In addition, the precious metal in Shanghai is trading at a premium to London prices, although for most of last year it was a discount.
Dynamics of the difference in gold prices between Shanghai and London
Strong demand in Asia and buying from central banks (they bought 8.8 tons on a net basis in February) helped partially offset capital outflows from specialized exchange-traded funds and allowed gold to find a bottom near $1,680 an ounce. Now, thanks to lower Treasury yields and the weakening of the US dollar, the bulls on XAU/USD have a good opportunity to develop a counterattack.
The Fed has finally convinced the financial markets of its readiness to allow the economy to overheat, and now the dynamics of the American currency will largely depend on the changing epidemiological situation and the acceleration of vaccination in the eurozone. In April-June, the EU will more than triple its purchases of vaccines against COVID-19 compared to January-March, while the eurozone's exit from the lockdown will contribute to the growth of EUR/USD and the fall of the USD index due to the high share of the euro in the structure of the indicator.
Technically, on the daily chart of gold, the Wolfe Wave and Double Bottom patterns still take place. A successful storm of resistance at $1,750 per ounce will allow long positions to be formed and open the way for gold in the direction of $1,835 and above.
Gold, Daily chart
