No matter how strong the US employment data for May look, the crisis is not over yet. And when it ends, the United States will accumulate a mountain of debt, their financial condition will deteriorate, which can undermine the status of the dollar as the main reserve currency. At such times, investors run to gold, whose positions quickly recovered after sagging to support at $1,675 per ounce, which allowed traders to form long positions following my previous recommendations.
Commerzbank notes that gold ETFs marked a three-day capital outflow, the longest since March. Impressed by the S&P 500 rally, investors were looking for money to buy stocks in time and selling products from specialized exchange-traded funds. However, in my opinion, such a strategy will quickly become unpopular: first, the precious metal was able to quickly recover its losses incurred earlier; second, stock indices need to be corrected. Their upward movement is strongly supported by the White House, which claims that, despite strong statistics on American employment, additional fiscal stimulus will still be needed.
A week ago, gold was walking on the same road with the US dollar, but even then it was clear that their direct correlation could not continue for a long time. Growth forecasts for XAU/USD are linked to expectations of a weakening of the "American". The growth of the double deficit, the expansion of the Fed's balance sheet, and the Central Bank's continued low-interest rates over a long period suggest that the upward trend in the USD index has changed to a downward one.
Dynamics of gold and the US dollar
Indeed, in the second quarter alone, the Treasury will issue $ 3 trillion in bonds, which will increase the national debt to 130% of GDP. Ten years ago, we were talking about a figure of 100%. At the same time, rising yields due to expectations of a V-shaped recovery in the US economy will force the Fed to use the Japanese and Australian experience of targeting debt market rates. According to Bloomberg experts, this will happen before September, and control will be exercised over 2 or 5-year securities. By limiting the growth of profitability, Jerome Powell and company will deprive the dollar of an important trump card. At the same time, the acceleration of inflation will lead to a decrease in real rates on Treasury bonds, which is good news for gold.
Dynamics of gold and US bond yields
The crisis is not over yet and the Fed is simply obliged to use "dovish" rhetoric at the June FOMC meeting, so as not to provoke a serious correction in the stock market, which is extremely inappropriate in the run-up to the US presidential election. The World Bank estimates that global GDP will shrink by 5.2% in 2020, and the economy of developing countries by 2.5%, for the first time in 60 years.
A technically successful assault on the dynamic resistance in the form of moving averages and the 1-3 line of the 1-2-3 pattern will increase the risks of resuming the northern march of the precious metal in the direction of the target by 161.8% according to the AB=CD pattern. Formed from the level of $ 1675 per ounce, we hold longs and increase them on breakouts of resistance.
Gold, the daily chart
