The third consecutive reduction in the growth rate of producer prices in the U.S. was a false dawn for gold. The XAU/USD quotes soared only to fall after Christopher Waller's statements that the Federal Reserve would move slowly and methodically on the path to easing monetary policy. This is despite inflation being surprisingly close to the 2% target. The Fed's reluctance to follow market cues lowered the odds of the first rate cut in the federal funds in March from 77% to 65%, increased Treasury yields, and weakened the position of the precious metal.
At the beginning of 2024, there was much talk about the "bullish" prospects of gold. In 2023, ETFs focused on it lost about $13.5 billion, which seemed illogical against the backdrop of a 13% rally in XAU/USD. In fact, all commodity-specific exchange-traded funds were under pressure due to slowing inflation, losing a total of $15.1 billion. The New Year appeared promising to investors. The Fed's easing of monetary policy was expected to lead to a transfer of money from the popular money market funds of 2023 to stocks, bonds, Bitcoin, and gold.
However, market expectations of a federal funds rate cut from 5.5% to 4% seem overly optimistic, as does the anticipated start date of monetary expansion in March. In this regard, Waller's speech about the Fed's deliberateness and methodical approach forces investors to reconsider their views. This leads to an increase in Treasury yields and the U.S. dollar, creating an extremely unfavorable environment for precious metals.
Dynamics of Bond Yields and the U.S. Dollar
Gold enthusiasts cling to its status as a safe-haven asset amidst escalating geopolitical conflict in the Middle East, elections in Taiwan, and Donald Trump's victory in Iowa. In reality, the root cause lies deeper. The main reason for the slowdown in global inflation is the cessation of supply shocks and the restoration of supply chains. However, Houthi attacks on ships in the Red Sea again raise fears of their disruption, which could lead to a new spike in inflation and the maintenance of the federal funds rate at 5.5% for an extended period. Bad news for precious metals.
Moreover, gold is losing to the U.S. dollar in the battle for the status of a safe-haven asset at a time when Treasury yields are rising. This process is happening in January. Furthermore, debt rates risk rising even higher if strong U.S. retail sales statistics convince investors of the U.S. economy's robust positions. Why would the Fed cut rates if economic activity is high?
Technically, a reversal pattern 1-2-3 is forming on the daily chart of the precious metal. Its activation portends, if not a break in the upward trend, then a deep correction. Therefore, as long as gold remains below the fair value of $2,033 per ounce, the focus should be on sales towards $2,004 and $1,975.
