Fear and greed. Pessimism and optimism. These feelings always go hand in hand in the financial markets. The easiest way to determine investor sentiment is the ratio of the S&P 500 and gold. The stock index is a kind of indicator of global risk appetite, the precious metal is a safe haven asset. When people are confident in a bright future, they buy shares, and they do not need gold that does not bring interest income. On the contrary, "fear" pushes investors to increase the share of precious metals in portfolios. The fact that the ratio of the two assets has grown to the highest level since 2018 indicates only one thing. The victory of those for whom the glass is half full.
Dynamics of the ratio of S&P 500 and gold
The market's belief in rapid economic growth is strengthening every day. According to forecasts of central banks, European GDP in 2021 will add about 4.5%, American and British will expand by 7% or more. Business activity indices are storming historical highs, and the S&P 500 has rewritten a record peak for the 33rd time in 2021. The same amount as for the whole of last year. Even the spread of the delta variant of COVID-19 on the planet does not bother anyone. Greed rules the markets. Not very good news for gold.
The growth of global risk appetite and the change in the Fed's rhetoric are two key drivers of the 8% fall in XAU/USD quotes in July. We are talking about the worst monthly result since November 2016 against the background of the best dynamics of the US dollar since March 2020. One can only wonder at the stability of stocks focused on precious metal ETFs. They added about 1.6% in May, and there are no sales yet in sight. Nevertheless, Commerzbank notes that a further peak in gold will force investors to flee from specialized exchange-traded funds, which will become an additional catalyst for falling prices.
Monthly gold dynamics
It is difficult for gold to find the ground under its feet when five FOMC members are already talking about a possible increase in the federal funds rate in 2022. The latest of them was the recently elected official Christopher Waller, who said that the Central Bank will probably have to start curtailing the $120 billion quantitative easing program this year so that it has the opportunity to raise the federal funds rate next year.
The report on the state of the US labor market for June should be a serious test for gold. Reuters experts expect a 690,000 increase in employment outside the agricultural sector after +559,000 in May, as well as a decrease in unemployment to 5.7%. The approach of the US economy to full employment is a strong argument in favor of strengthening the positions of the "hawks" within the FOMC, which is a "bullish" factor for the US dollar and a "bearish" one for the precious metal. Morgan Stanley expects it to fall to $1,700 per ounce over the next 6 months and further sales in 2022 due to the impending reduction in the scale of the Fed's asset purchases as part of American QE.
Technically, the implementation of the Bat harmonic pattern with a target of 88.6% continues on gold's daily chart. It corresponds to the mark of $1,700 per ounce. The reason for the sales will be a successful assault on the support at $1,750.
Gold, Daily chart
