Gold crossed the line. Forecast as of 15.11.2021

Gold showed the best weekly dynamics in six months, although the US dollar is near 16-month highs against the euro. Isn’t it a paradox? Let us discuss the Forex outlook and make up a XAUUSD trading plan.

Fundamental gold forecast for a week

The rise of gold by $40 per ounce, after the release of data concerning US consumer price rise by 6.2%, was the biggest surprise for me in over 20 years of observing financial markets. Neither the downgrade of the US credit rating in 2011, nor the SNB’s refusal to fix the franc against the euro in 2015, nor the Brexit referendum and Donald Trump’s victory in 2016 made such an impression as the unexpected rise of XAUUSD. In those cases, the assets’ reaction was adequate. This cannot be said about the precious metal.

I am a long-time opponent of the idea that gold is a hedge against inflationary risks. In the 1970s, the abandonment of the gold standard was accompanied by a rapid rise in prices, which is why investors had such associations: if you want to protect yourself from inflation, buy precious metal. Next, the fate of XAUUSD depended not on the CPI, but on what the Fed thought about the CPI. The question is why, throughout 2021, high consumer prices were bad news for gold? And why in November, the rise of the indicator to 6.2% turned everything upside down?

Why over the decades the “anti-dollar” gold was falling when the greenback was rising, and now they suddenly began to grow together? EURUSD price is near a 16-year low, and gold has its best week in half a year. Isn’t it a paradox?

Why aren’t ETF stocks increasing? If you want to protect yourself from the loss of the purchasing power of paper money, would you prefer a physical asset or papers like futures?

Dynamics of gold and ETFs

Source: Bloomberg.

In my opinion, the XAUUSD rise is obvious speculation based on investors’ doubts about the Fed’s ability to control inflation. There is talk in the market that high prices are not temporary, and that the central bank cannot solve supply chain problems or force OPEC+ to produce more oil. As a result, inflation is currently growing faster than the nominal yield of Treasury bonds. This is driving real debt rates down to historic lows. It is worth mentioning that the decline in real profitability creates the best conditions for speculation.

What will happen in 2022? Most likely, inflation will decrease in the second half of the year, which is due to two factors, namely the underlying effects and the fight against the pandemic. According to Janet Yellen, it was COVID-19 that was the main reason for the CPI rise. As soon as it ends, prices will begin to slow down. These events do not cancel plans for two to three federal funds rate hikes in 2022 and will continue to support the US dollar. Moreover, under political pressure from Biden, dissatisfied with the acceleration of inflation, the Fed may act more aggressively than expected in the near future. Namely, taper QE faster and start monetary restriction earlier than is currently expected.

Weekly gold trading plan

If the Fed really starts to act more hawkish, gold will be in trouble. The historical connection between the precious metal and the greenback will be restored, and XAUUSD downtrend will return. In this regard, the price drop below $1850 and $1835 per ounce will be a reason for the shorts’ formation.

  

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.

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