As a rule, gold declines during periods of increased monetary tightening by the Fed. Conversely, it tends to appreciate as soon as the central bank makes a dovish reversal. In the current cycle, the usual patterns have not been observed. Let’s discuss this topic and make a trading plan for the XAUUSD.
The article covers the following subjects:
Highlights and key points
- Gold is flowing from east to west, indicating a bullish trend.
- De-dollarization, central banks, and geopolitics have dashed the hopes of bears.
- The Fed’s monetary expansion creates a tailwind for the XAUUSD.
- The precious metal may reach $2,800 per ounce by mid-2025.
10-month fundamental forecast for gold
Despite the People’s Bank of China’s lack of purchases to replenish foreign reserves for a month, gold prices have surpassed the previously projected level of $2,500 per ounce. Imports in July fell 24% to 44.6 tons, the lowest level over two years, and prices in Shanghai are lower than in London. With demand from Asia’s largest economy declining, it is essential to explore alternative sources of demand.
China gold imports
Source: Bloomberg.
Typically, a bearish trend in the XAUUSD is observed when gold flows from west to east. Conversely, this represents a bullish trend in the opposite direction. These movements are based on the Fed’s monetary policy. When the Fed tightens, US Treasury bond yields grow, and the US dollar strengthens. The precious metal becomes cheaper and is purchased in Asia. As appetite from China and India grows, prices rise, demand falls, and the Fed’s shift to monetary expansion leads to a spillover of gold in the opposite direction – from east to west.
Gold price difference
Source: Bloomberg.
This is exactly what is happening now. However, the XAUUSD did not face a bear market. Despite the increase in the federal funds rate in 2022-2023, the precious metal grew steadily. The uptrend was supported by elevated geopolitical risks, including armed conflicts in Eastern Europe and the Middle East, as well as the associated de-dollarization of the economies of the conventional east, including China and Russia.
Buoyed by these strong bullish drivers, gold has continued to grow despite the rise in US Treasury bond yields, the strengthening US dollar, and capital outflows from ETFs. This is thanks to the Fed’s dovish reversal, which has created traditionally favorable conditions for the precious metal. ETF holdings have been rising for the second month in a row, and the USD index is falling along with the US Treasuries.
Gold ETF holdings
Source: Bloomberg.
The political landscape may intensify the XAUUSD rally. In particular, the approaching US presidential election will create uncertainty in the markets, which will increase demand for safe-haven assets, including gold.
The bullion is likely to benefit regardless of the outcome in November. If Kamala Harris wins, the Fed will be able to pursue a policy of lowering the federal funds rate. If Donald Trump is elected, the policy of a weak dollar, including through currency interventions, will maintain interest in gold as a reliable asset.
10-month trading plan for gold
In this regard, UBS Global Wealth Management’s forecast of $2,700 per ounce by mid-2025 appears to be a realistic estimate. However, it may be prudent to adjust this figure to $2,800. Investors may maintain their long positions on the XAUUSD and consider opening more long trades on pullbacks.
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 position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.