Gold crashes. Forecast as of 16.09.2022

Going against the Fed, like the US stock indexes, gold eventually crashed. The XAUUSD price rolled down to the lowest levels since April 2020. Is there any chance for gold to grow in value? Let’s discuss it and make a trading plan.

Monthly gold fundamental forecast

Gold failed, having followed the expectations of the Fed’s dovish shift. Investors thought that a drop in US inflation would force the central bank to slow down its monetary tightening pace. The XAUUSD trades went against the Fed and lost. The gold price dropped to the lowest level since April 2020, and this may not be the bottom.

Gold, like most financial market assets, reacted violently to the release of US inflation data for August. The rise of the core indicator to 6.3 Y-o-Y and 0.6% M-o-M shocked the market. The Fed’s inflation target is far, and the central bank has no choice but to continue its aggressive monetary tightening. Investors were so worried that CME derivatives once gave a 35% chance of a 100-basis-point rate hike in September. Two big steps earlier had a less significant impact on US inflation than had been expected. So, some analysts suggest the Fed should resort to a more significant move to curb inflation.

As a result, the Treasury yields grow by leaps and bounds, investors believe that the federal funds rate will reach 4.4% in 2023, and the US dollar is the only option to buy currently. No surprise that gold is weakening.

Dynamics of expectations for Fed’s rate peak and Treasury yields

Source: Bloomberg.

Gold is traded in US dollars. The 15% rise of the USD index since early 2022 naturally resulted in the gold downtrend. The precious metal doesn’t earn interest, so it can’t compete with Treasuries when their yield is skyrocketing. Furthermore, money outflow from gold ETFs and economic expansion in China, the biggest gold consumer, slows down. Looking at the country’s problems with COVID-19, Bloomberg experts do not suggest that China’s GDP in 2022 will expand by more than 3%.

What will support the XAUUSD? I suppose the gold will rise if the US economy slides down into a recession. In this scenario, the Treasury yield will fall, and the US dollar will weaken amid the expectations of the Fed’s monetary stimulus. However, based on the US employment and retail sales data, the economic downturn will hardly start soon. That is why the gold downtrend is likely to continue. The US dollar will be the forex winner because of the federal funds rate increase to 4.4% and remaining there for a long time.

Monthly gold trading plan

Well, the shorts entered on the rebound from the resistance at $1730 yielded profits. The gold price could fall as deep as $1600. I recommend holding down shorts and adding up to them on corrections.

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.

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