Gold was able to pare its losses and is trying to cling to an important level of $1,280 an ounce on the background of the reluctance of dollar bulls to force events ahead of the announcement of the results of the FOMC meeting, details of tax reform and release of data on the US labor market. The support of XAU/USD has uncertainty associated with the choice of a new head of the Fed. Investors are 70% certain that Jerome Powell is the choice, but if they win back the remaining 30% and the seat is taken by John Taylor or Kevin Warsh, then the USD index will rise sideways towards the precious metal fans.
The yield rallies of the Treasury bonds and the US dollar became the main driver of the weakness of gold in October. Macroeconomic data on the US continued to improve, hopes for the implementation of the tax reform turned into a leap, while reducing the degree of geopolitical risks deprived precious metals of its necessary support. In the third quarter, US GDP showed resistance to natural disasters and accelerated to 3% q/q, which pushed up stock indexes, improved the global appetite for risk and led to large-scale selling of safe-havens assets. At the same time, the XAU/USD bulls are under pressure due to expectations on the implementation of fiscal reform. Reducing tax rates will potentially lead to increased consumption and investment. As a result, the US economy will grow steadily by 3%, while the average value since the financial crisis is only at 2.2%, and the growth of 3% and more for two consecutive quarters occurred only 3 times.
In this scenario, inflation will accelerate and will start to get out of the Fed's control. The Central Bank will need more aggressive monetary policy tightening, which is currently expected by the FOMC forecasts. The dollar will regain its authority, and gold will become an outcast. However, not all banks and investment companies adhere to this point of view.
TD Securities draws attention to the fact that in 1984-2012, against the backdrop of the growth of the national debt, the prices of precious metals also rose in accordance with the US GDP. The increase in the budget deficit and public debt worsens the financial position of the world's largest economy, raises the risks of default and supports gold and silver. As a result, they can grow to $1360 and $20 by the end of 2018.
Dynamics of precious metals
Source: Bloomberg.
One of the bulls for XAU/USD, Mitsubishi Bank also relies on uncertainty. According to the lender, recent months indicated that changes in the legislation are not given in small amounts, and by mid-December the issue of the ceiling of the national debt should be resolved, which will return the focus of investor attention from the second decade of November. These factors allow us to rely on the speedy return of gold above the psychologically important mark of $1300 per ounce.
Technically, precious metal is traded within the framework of consolidation in the range of $1260-1280. A breakthrough of its upper limit and the diagonal resistance will increase the risks of growth of prices towards $ 1295-1300. On the contrary, a successful support test at $1,260 per ounce will pave the way to a target of 200% for the AB=CD pattern.
Gold, daily chart
