Gold has lost almost a fifth of its value from its March highs, and to regain that lost luster it must do the impossible—beat the Forex king. This, of course, is about the American dollar, which sweeps away everything in its path. A host of problems in economies outside the US and an aggressive Fed allowed the USD index to climb to a 20-year high. The ascent continues, which pushes the XAUUSD quotes down.
For the precious metal to bottom, the dollar must peak. In the past, this has happened when the global economy outside the US has outpaced the US or the Fed has injected colossal amounts of cheap liquidity into financial markets.
The Fed is determined. It is willing to sacrifice its own labor market and economy to break the back of high inflation. The futures market and FOMC forecasts suggest that the federal funds rate will rise to 4.6%. However, given the core CPI's stubborn reluctance to slow down, one would expect the ceiling on borrowing costs to be even higher. Barclays predicts growth to 5–5.25%. If this happens, the USD index will continue to rally, and gold will fall into the abyss.
Dynamics of gold and USD index
The armed conflict in Ukraine, snap elections in Italy, the energy crisis in Europe, turmoil in the financial markets of Britain, and currency interventions in Japan. The list of shocks has not been so rich for a long time. But high inflation and geopolitical risks, as a rule, create a tailwind for gold. Indeed, in March, it jumped above $2,000 per ounce amid the war in Eastern Europe, but then, without options, it ceded the status of the main safe haven asset to the US dollar. And is still in its shadow.
What can break the downward trend in XAUUSD? Most likely, a recession in the American economy. In this scenario, the Fed will either slow down the process of tightening monetary policy or reverse it. According to Goldman Sachs, a dovish reversal or transition from raising the rate to lowering it will drive up the price of the precious metal by 18–34%. In my opinion, by the time this happens, there will be many moons in the sky.
Kotak Mahindra Bank believes that one of the factors that could slow the carnage in the gold market is increased demand for the physical asset from the largest buyers in the face of India and China. They account for about 50% of the world's precious metal imports. At the same time, the wedding season and the Lunar New Year will raise interest in gold. In my opinion, hardly. When prices fall, it moves from West to East. This is a common process that convinces the stability of the downward trend in XAUUSD.
Technically, on the daily chart, the inability of the gold bulls to latch onto the $1,670 an ounce fair value is indicative of their weakness. I recommend keeping the focus on selling the precious metal towards the pivot points at $1,620 and $1,580.
