March was the worst month for gold since the 2008 global economic crisis. Nevertheless, rumors of an imminent end to the conflict in the Middle East allowed the precious metal to first find a bottom and then surge into a counterattack. In this regard, Goldman Sachs maintains its forecast for XAU/USD to reach $5400, which adds fuel to the rally.
Monthly Dynamics of Gold
Rising oil prices will amplify inflationary pressures and measures to combat it through interest rate hikes in various countries and regions. If, prior to the conflict in the Middle East, the futures market had predicted a 35% chance of ECB rate cuts, as the war continues, derivatives have begun forecasting three rounds of monetary tightening. Investors assessed the chances of an increase in federal funds rates at 25%.
The higher the central bank rates, the higher the bond yields, and the stronger the currency. As a result, gold found itself in an extremely unfavorable environment. It does not pay interest, and therefore typically underperforms against Treasuries when their yields increase. The situation was exacerbated by the decline in US stock indices and fears about the global economy's fate. Consequently, the Turkish Central Bank began selling bullion to support the lira, while investors were forced to fulfill margin requirements on stocks and bonds.
Gold found its footing partly due to Jerome Powell's statement that energy shocks are temporary and that monetary policy is too slow to address them in real-time. This rhetoric prompted the futures market to discard expectations of a Fed tightening.
European Inflation Dynamics
Further developments indicate a rise in consumer prices in the Eurozone from 1.9% to 2.5%, while core inflation slowed from 2.4% to 2.3%. This dynamic serves as evidence supporting Jerome Powell's assertion that the oil shock will be temporary. The ECB is not planning to raise rates. Gold has taken another step forward.
The acceleration of the XAU/USD rally was sparked by Donald Trump's statement that the US intends to end the war in Iran within 2-3 weeks. Stock indices rose, and the funds supporting margin requirements for stocks were no longer needed at the same levels. Investors returned to buying the precious metal.
Moreover, Tehran did not criticize Donald Trump for negotiating with himself this time. Iran stated that it has the will to end the war, but several demands must be met first.
Technically, on the daily chart, gold is experiencing a rapid rally with a breakout of the first of three moving averages within the Williams' Alligator indicator. As a result, the level of $4650 per ounce turns from resistance into support. As long as the price of the precious metal remains above this level, the focus should be on buying XAU/USD. Initial targets for long positions are set at $4850 and $4935.
