Who would have thought after Jerome Powell’s speech about a higher federal funds rate peak that gold would not just recoup its losses, but return to 3-month highs?
In fact, the slowing pace of monetary tightening by the Fed is a bullish driver for the XAUUSD. If inflation stays at elevated levels for a long time and the central bank slows monetary tightening and eventually pauses, real Treasury yields will fall, allowing the precious metal to climb above $1,800 an ounce.
When trading gold or eur usd charts, remember that a trader can try to dictate terms to the market, but it makes no sense – the market won’t notice those attempts. The volumes are too large for one speculator to control the situation. Such examples exist in history, such as Soros’ attack on the British pound, but it is rather an exception. Ordinary traders are incapable of it.
The November Gold Rally
- The main catalysts for the 9.5% November gold rally were consumer and producer price data releases.
- Both indicators slowed more than Bloomberg experts predicted, giving rise to talk that the Fed is doing a good job and can afford less aggression.
- Ultimately, monetary tightening is affecting the economy with a time lag, rates are already at restrictive levels, so it may not be going as fast as before.
However, to beat inflation, one must have a good understanding of its causes. The Fed and the White House overreached with stimulus in response to the pandemic. As a result, domestic demand grew 21.4% in the three years to the end of the second quarter of 2022, the equivalent of 6.7% annual GDP growth. No wonder inflation is so high and the labor market is as strong as a bull. Americans sitting on a mountain of dollars are in no hurry to get back to work.
Sooner or later the money will run out, which will lead to a slowdown in consumer prices in the States itself. The Fed’s aggressive monetary restrictions have the potential to exacerbate their decline. There is a risk of deflation on the horizon, as in Japan. That’s a scenario Ark Invest agrees with. The company cites the example of the early 20th century. It was marred by World War I and a Spanish flu epidemic. Inflation in the U.S. in 1920 exceeded 20%, but thanks to an aggressive increase in the federal funds rate from 4.6% to 7%, it already fell to -15% in 2021.
Current conditions have a lot in common with a century ago. The same scenario is not out of the question, but in my view it is unlikely. Its realization would be disastrous for gold, returning its quotations to $1,610 per ounce.
On the contrary, a variant when FRS slows down and as a result makes a pause, and inflation remains at elevated levels, creates a tailwind for precious metals. With real Treasury yields falling, the U.S. dollar is also weakening.