What will happen to the gold price? Will it grow due to inflation, or will it fall due to accelerated global economic growth? To answer this question, you need to understand the situation better. Let us analyze the gold outlook and make up a trading plan
Monthly gold fundamental forecast
For decades, investors have been taught that gold is a hedge against inflationary risks, so it responds to fluctuations in consumer prices. In fact, gold is reacting to the Fed’s statements about inflation. If the central bank considers it a threat, it is time for the XAUUSD bulls to give in, if not, they will continue to dominate the market. In this regard, the FOMC’s dovish stance contributed to the return of the gold price to the zone of 4-month highs.
Most of the problems in financial markets are instigated due to misunderstandings. A banking corporation, Julius Baer, claims that the acceleration of global economic growth will reverse the gold uptrend. Capital Economics, for the same reason, expects the precious metal to reach $1,600 an ounce at the end of the year. The history of the world GDP acceleration is the story of the weak US dollar, which creates growth drivers for XAUUSD. Well, at least UBS calls inflation, growth of Treasury yields, and a strengthening greenback as the reasons justifying the $1600 price. This is closer to the truth than accelerating global economic growth.
Capital inflows into gold-focused ETFs in May after three months of outflows, as well as speculative net longs rising to their highest levels since January, indicate that gold bears are now in the minority.
Dynamics of gold ETF holdings and XAU speculative positions
Source: Bloomberg.
Since the beginning of the year, the fall of cryptocurrencies’ prices has made the gold move from the red to the green zone. Bitcoin was one of the most efficient tools for investment throughout 2020 and the first four months of 2021. It was called an alternative to gold as a hedge against inflationary risks. However, when Elon Musk spoke about the harm of Bitcoin to the environment, Chinese officials tightened their policy towards miners, and central banks began to express disapproval, BTC began to decline, negatively affecting other assets. As a result, investors are selling Bitcoin-focused ETFs and returning money to gold ETFs.
In my opinion, the situation with a slower than expected recovery of the US labor market and accelerating inflation is ideal for gold. It makes the Fed think that the recovery of the US economy after the pandemic and recession will be difficult, so it is too early to abandon monetary stimulus. This fact puts pressure on both bond yields and the US dollar, encouraging the XAUUSD bulls. Ultimately, traders must understand that gold prices do not depend on inflation, but on what the Fed’s officials think about inflation.
Monthly gold trading plan
A falling greenback price and stabilized Treasury yields create the preconditions for further growth of ETF holdings and speculative net longs. The update of the May high is likely to contribute to the continuation of the gold rally in the direction of the previously indicated targets of $1905 and $1955. I recommend holding and adding up to long positions on the 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 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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