When the Fed is inactive, the XAUUSD bulls look encouraged. This was the case in the spring of 2021, and it is happening now. While FOMC officials say it is too early to raise rates, the gold price is rising. But aren’t they lying? Let us discuss the Forex outlook and make up a gold trading plan.
Quarterly fundamental gold forecast
The return of the gold price to $1,800 per ounce looks paradoxical against the background of the USD strong position, the rapid growth of Treasury bond yields and the flow of capital from gold-oriented ETFs to the cryptocurrency market. Some immediately recalled the dubious function of gold as an asset that protects against inflation. However, it has historically been proven that XAUUSD is less responsive to price rise than to real US debt rates. What happens to the precious metal?
Dynamics of gold and inflation in the USA
Source: Financial Times.
In my opinion, the reason is the Fed’s desire to hide its own mistake. For a long time, central bank officials talked about the temporary nature of high inflation. They now continue to adhere to this mantra, but clarifying that this period may be longer than expected due to supply shocks. However, history shows that supply chain disruptions were not the cause of high consumer prices. This was the case in Japan in the 1970s, when, despite the rise in oil prices, the CPI remained low. This is currently the case in China. The PRC, like the rest of the world, is facing both supply shocks and an energy crisis, but consumer prices there are growing by less than 1%.
The acceleration of inflation is taking place in countries that used large-scale incentives to overcome the financial crisis. According to Milton Friedman, inflation is always and everywhere a monetary phenomenon. The fact that due to the crazy monetary expansion of the Fed, the money supply will increase by $10.6 trillion from 2020 to 2024, and only $2.4 trillion of that will be absorbed by the economy, speaks of the high CPI’s long-term nature.
Both the Fed and the Treasury Department’s head Janet Yellen, that argues that the United States has not lost control of inflation, are wrong. Consumer prices will continue to grow by 4-5% in the second half of 2022, which will force the central bank to aggressively raise rates. This is bad news for gold. At least in the long run. In the meantime, the XAUUSD bulls go ahead thanks to an equally rapid rise in inflation expectations compared to the rally in US Treasury yields. As you know, the precious metal is sensitive to the dynamics of real interest rates on debt.
Dynamics of gold and Treasury yields
Source: Financial Times.
Gold is supported by rumors that the Fed will not raise rates earlier than fall 2022 due to fears that such actions will lead to global stagflation. This forces investors to exit USD longs. However, in reality, the central bank keeps something back. Jerome Powell calls for patience so the job market can recover. The head of the Fed leaves a way to retreat, arguing that with the further acceleration of inflation, the Fed will not remain passive.
Quarterly gold trading plan
Next year, I expect not only the tapering of the US QE program, but also an increase in the federal funds rate. This circumstance makes the potential for a gold rally limited. XAU growth towards $1820, $1835 and $1850 per ounce should be used to enter sales.
Price chart of XAUUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official…