The Fed is enjoying its victory over the financial markets, and gold is falling down uncontrollably. It was this scenario that seemed to us the most realistic, which allowed us to successfully form shorts from $1,765 per ounce, increase them and enjoy how the market gives us money. The "don't go against the Fed" principle has once again knocked out stocks, bonds, and XAUUSD bulls, and now one can only guess how low the quotes will fall.
According to Minneapolis Fed President Neel Kashkari, investors understood the essence and after Jerome Powell's speech at Jackson Hole, they realize the seriousness of the Fed's desire to reduce inflation to 2%. He is completely satisfied with the reaction of the financial markets. Indeed, to beat high prices, the Central Bank needs to tighten financial conditions, that is, strengthen the dollar, raise Treasury yields, and lower stock indices. It is these processes that take place at the end of August. They are extremely unfavorable for the precious metal.
Dynamics of gold and US dollar
Due to the hawkish Fed and the increased likelihood of a 75 bps increase in the federal funds rate in September, from 50% to 71%, gold is preparing to mark the fifth monthly close in the red zone in a row. This is the worst performance in four years. Stocks of precious metal-oriented ETFs have been declining for the fourth month in a row.
Investors really correctly interpreted the signals given by Jerome Powell and his team about the continuation of the monetary restriction cycle. According to New York Fed President John Williams, they will exceed 3.5% and remain at or above that level for the next year. Given the official's forecast of a slowdown in US inflation to 2.5–3% in 2023, the real amount of borrowing costs will go into the positive area. This is exactly what is required to defeat high prices. For gold, this means only one thing—collapse.
Indeed, along with a strong US dollar, rising real treasury yields are creating such a strong headwind for XAUUSD bulls that it just knocks them off their feet.
Precious metal fans secretly hope that the Fed will be frightened by the prospect of going too far—raising the federal funds rate too quickly and too high, which will drive the US economy into recession. However, Powell made it clear at Jackson Hole that the Central Bank is willing to sacrifice it and the labor market in order to bring inflation to its knees. The regulator chooses decisiveness over caution, which is a strong selling point for XAUUSD.
Technically, there is a steady downward trend on the gold daily chart. Targets for the parent and child patterns AB=CD allow you to identify the downside potential of the precious metal. We are talking about the mark of $1,600 per ounce. In such conditions, it makes sense to hold shorts formed from the level of $1,765 and periodically build up on pullbacks.
