Gold is set to decline. Forecast as of 22.11.2021

According to XAUUSD bulls, the gold rally is based on high inflation. However, historically, the precious metal has not reacted to inflation, but to what the Fed thinks about inflation. What has changed now? Let us discuss the Forex outlook and make up a gold trading plan.

Fundamental gold forecast for a week

The price of gold will have to fall no matter how good it looks in the short term due to the historically low real yields on US Treasury bonds. The strong dollar, the hawkish Fed, and the US economy’s willingness to withstand higher debt rates allow me to recommend selling XAUUSD. No matter how high the price of gold has risen.

According to the USB, the fair value of gold is $1,910 per ounce. This forecast is based on the TIPS yield and the USD index. However, the bank lowered its forecast for the gold price for 2022 from $1,900 to $1,860, citing its inability to compete with Bitcoin. The USB officials probably believe that the lack of capital inflows into gold-focused ETFs is caused by the flow of money into the crypto market. In my opinion, the reason is different. XAU buyers are well aware of the speculative nature of the gold rally and are reluctant to buy what looks too expensive today. Indeed, according to the CFTC, hedge funds have increased their gold net longs to their highest levels in ten months.

Speculators rely on fast-growing inflation. In the US, Canada and the UK, it reached the highest levels in several decades. In Turkey, Brazil and Argentina it accelerated to double digits.

Inflation dynamics

Source: Financial Times.

The problem is that gold price reacts not to inflation, but to what the Fed officials think about inflation. As long as the Fed continued the mantra about the temporary nature of high PCE, the precious metal was doing just fine. But currently, FOMC officials deny both the longer-term nature of price growth, associated not only with supply chains, but also with domestic demand, and the frenzied pace of labor market recovery. According to Christopher Waller, at the current rate of increase in employment, unemployment will very soon return to 4%. This will allow raising the federal funds rate in the second quarter.

The Fed Vice President, Richard Clarida, stated that the issue of accelerating the QE tapering will be discussed in December. This led to an increase in the probability of three acts of monetary restriction in 2022 significantly above 50%, although a month ago it was about 25%. This contributes to both the rally in Treasury yields and the strengthening of the dollar, as well as an increase in its volatility, which is an alarming signal for gold.

Dynamics of the US dollar volatility


Source: Bloomberg.

Weekly gold trading plan

The possible appointment of Lael Brainard as chairman of the Fed serves as a risk factor for the XAUUSD bulls. If that happens, the chances of an aggressive monetary tightening in 2022, Treasury yields and greenback yields will drop for a while. However, rates will rise anyway. This circumstance gives reason to adhere to the previous strategy of gold sales. XAU inability to return above $1850 is a sign of the bulls’ weakness and 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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