Unlike the oil market, where prices are based on supply and demand for a physical asset, the gold price is determined by other factors. Let us analyze the gold outlook and make up a trading plan
Monthly gold fundamental forecast
Banks and investment companies are trying to find reasons for the soaring gold price by analyzing the rise in Indian imports to a 2-year high of 98.6 tons, strong demand for physical assets in China, and even the collapse of Bitcoin after the launch of Coinbase. At the same time, technical analysts associate the precious metal’s rise with prices exceeding the 50-day moving average. It’s obvious to me that the weakening US dollar and falling Treasury yields have created favorable conditions for the XAUUSD bulls. If the situation with the greenback is more or less clear, then the drop in the rates of the US bond market to monthly lows has yet to be dealt with.
Dynamics of gold, US dollar and bond yields
Source: Bloomberg.
Gold bears claim that the price of the precious metal is growing not due to, but despite the expected boom in global economic growth. The bears sincerely hope that the XAUUSD rally will not continue without the reversal of the specialized exchange-traded funds’ downtrend. Indeed, from November to March, the indicator decreased by 9% in physical terms. In March alone, ETF investments fell by 108 tons, which is equivalent to $6 billion.
In my opinion, physical gold prices follow the ETF trend, not vice versa. In March, the bond market tested the Fed’s ability to be true to the principle of non-interference. Treasury yields were growing rapidly, which contributed not only to the US dollar strengthening but also to the fall of precious metals prices. In this regard, neither Beijing’s permission for Chinese commercial banks to import gold to meet growing demand nor the rising premiums in Shanghai and London, matters as much as the collapse in US debt rates and the greenback fall.
The sharp decline of the Bitcoin price after the launch of Coinbase affects the stocks of specialized exchange-traded funds rather than the XAUUSD price. We must admit that part of the capital flowing from ETFs has been deposited in crypto-funds. The question immediately arises, what comes first, the prices for the gold assets or the physical gold prices?
Dynamics of gold and bitcoin funds reserves
Source: Bloomberg.
The USD index is losing ground for two reasons. First, the good news about the bright future of the US economy has already largely worked out. Second, the eurozone economy is starting to recover. The reason for the decline in Treasury bond yields, lies in the growing demand for them from foreign investors, primarily from Japan, as well as in the market’s belief in the Fed.
The Federal Reserve believes that the surge in inflation will be temporary. Then again there will be deflationary pressures, which many central banks are simply unable to cope with. If so, then the rise in Treasury yields should also be seen as a pullback within a long-term downtrend. This fact, combined with the USD index’s bearish sentiment, creates favorable conditions for the XAUUSD bulls.
Monthly gold trading plan
I recommend holding and adding up to the long trades entered on the corrections following the breakout of the resistance at $1,750 per ounce.
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 LiteForex. 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.
