
The US Dollar has been remarkably sluggish for the past few weeks despite being within a distinct Demand zone…
2022-11-23 • Updated
Usually, the gold price is driven by political and economic uncertainty, like economic crises, election pressure, pandemic effects. But in the face of a year-and-a-half-lasting monetary stimulus program, the price of the haven asset acts differently. What drives gold price and how to trade it – in this article.
Fundamental analysis of gold should start with an explanation of gold nature. In the past, there was the Gold Standard. It was a system under which nearly all countries fixed the value of their currencies in terms of a specified amount of gold or linked their currency to that of a country that did so. Also, the supply of gold hasn’t been increasing greatly with time. Thus, when the amount of money was increasing (inflation rises), to buy the same amount of gold we needed an increased amount of currency. Since the economic crises usually come with high inflation, gold has become the haven asset for every country.
But nothing lasts forever, and in August 1971, US President Nixon severed direct convertibility of US dollars into gold. From this very moment, gold has become a more independent asset, but the rules of the game didn’t change much. Demand for gold is still high due to several factors: gold is resistant to corrosion, easy to process, hard to imitate, and looks beautiful (the last factor is subjective).
From this point we have several considerations about gold price movements, let’s go through them:
Let’s go through several economic events and check whether they are affecting XAU price or not:
To sum up, this data, even if the events and the results are the same (March 31 and September 1), gold can act in a completely different manner. Besides that, we can expect gold to rise when any data is bad for USD and vice versa. This can be proven by looking at XAU/USD and US dollar index charts, or by looking at correlation charts.
XAU/USD daily chart (top) and US dollar index daily chart (bottom)
USD and gold correlation chart (10 years period)
As you can see on the charts, most of the time gold and dollar gave an inverse correlation. It means that when the dollar is gaining new highs, gold is under pressure and vice versa.
So far (September 13, 2021) the economic recovery is not as fast as everyone wants and while tapering has been postponed, again and again, the demand for the US dollar is present and gold is not in a good shape. You might think: “Wait, if the economy is in a bad shape, then it’s good for gold, isn’t it?” Yes, usually in times of uncertainty gold is showing better results than other assets, like stocks and currencies. But this doesn’t mean that gold doesn’t fall at all.
From the side of technical analysis, gold is looking bearish too.
XAU/USD weekly chart
Support: 1750.0; 1685.0
Resistance: 1840.0; 1900.0
Gold is a perfect instrument to keep your money safe because it tends to maintain its purchasing power and save you from the volatility of other assets, but as global markets tend to rise on a bigger time scale, gold won’t earn you a lot.
The US Dollar has been remarkably sluggish for the past few weeks despite being within a distinct Demand zone…
A comparative examination of the strength of the US-Dollar often gives tangible insight into the direction of Gold (XAUUSD). The chart above indicates the expectation of a bullish price reaction from the demand zone
For those who may be unfamiliar with Price Action trading, the horizontal arrows represent areas where the market structure was broken. As you can see in the scenario above, price broke below the previous low at the two marked instances
This week, there are a few high-probability trade ideas I'd like to recommend to you. Trading these setups, be sure to implement a proper risk management approach.
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