History shows that gold has often struggled at the start of Fed tightening cycles but ended them higher. As the tightening cycle progressed, much of the fear was already priced into XAU/USD. Let’s discuss this topic and outline a trading plan.
The article covers the following subjects:
Major Takeaways
- Gold has recovered losses from the Fed rate hike.
- ETF demand is supporting the precious metal.
- Historically, Fed tightening has not prevented XAU/USD from rising.
- A breakout above $4,400 per ounce would be a reason to buy gold.
Weekly Fundamental Forecast for Gold
Fear sees danger everywhere. Gold does not necessarily have to fall when the Fed tightens monetary policy. History shows that the precious metal often weakens at the start of a tightening cycle but gradually recovers as the federal funds rate rises and may finish the cycle higher. This time, XAU/USD bulls did not wait for a deep correction and bought the dip right at the start of the Fed’s tightening cycle.
In June 2004, gold traded around $380 per ounce when the Fed, led by Alan Greenspan, delivered the first rate hike of the cycle. It then climbed about 400% to record highs by 2011. When Janet Yellen first tightened monetary policy in 2015, the precious metal fell to a multi-year low near $1,050. However, nine rate hikes by 2018 did not prevent gold from gaining 14%. In 2022, Jerome Powell’s tightening cycle weighed on XAU/USD. Nevertheless, by the end of the cycle, gold had risen 36%.
Gold Performance During Fed Tightening Cycles
Source: TradingView.
These examples show that as the Fed continues to raise rates, markets gradually price in the fear. Four years ago, the metal was supported by de-dollarization and central-bank reserve diversification. Today, support comes from the debasement trade and strong investment demand.
Indeed, holdings in gold-focused ETFs continue to rise despite the decline in XAU/USD. Although ETF flows are generally expected to follow gold prices, the divergence suggests strong investor interest and supports gold.
Gold Prices and ETF Holdings
Source: Bloomberg.
So what do XAU/USD bulls really have to fear? If the Fed tightens too aggressively, the US economy could slip into recession. A downturn would create favorable conditions for a safe-haven asset such as gold. If the central bank moves too slowly, the US dollar may struggle to strengthen significantly against major currencies. Together with lower Treasury yields, this would support non-yielding gold.
Particular attention should be paid to the debasement trade. The Bank of England’s reluctance to follow the Fed and disagreements within the Bank of Japan’s policy board have weakened the pound and the yen. Unless demand for fiat currencies recovers, a sharp decline in XAU/USD appears less likely. Gold may remain well supported, with investors continuing to buy the dips.
Weekly Trading Plan for XAU/USD
Overall, gold could benefit regardless of how quickly the Fed tightens monetary policy, and history supports this view. So, it may make sense to continue buying XAU/USD on pullbacks or after a breakout above resistance at $4,400.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of XAUUSD in real time mode
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