Gold is acting randomly. Or is it?

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.

Latest news:

• Gold breaks beneath $1800 with $1700 as a reachable target.
• US 10-year Treasury yields rise, emphasizing the demand for the US dollar.
• Fed plans to start bond tapering this year.
• US inflation rate has already hit 5.4% in June and July 2021.

Retrospective gold movement analysis

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:

1. US treasury yield rises USD demand rises  USD rises.
2. When USD is rising, gold (XAU) is plunging (this has come from times of the Gold Standard and remained even after it).
3. Gold supply isn’t increasing as fast as demand, thus, in the long-term gold will continue to rise.

What is affecting the price now?

Let’s go through several economic events and check whether they are affecting XAU price or not:

• March 31, 2021: US ADP NFP data is worse than expected (517K vs. 552K; positive for gold, negative for currency). Gold has been skyrocketing for the next 6 hours and has gained 2%.
• June 16, 2021: Federal funds rate remained at the same level (0.25%), which is positive for the currency. Also, there were intentions for rate hikes in the future. Gold has plunged 3% in 3 hours.
• August 6, 2021: positive US NFP data (943K actual vs. 870K expected). Gold has “flash crashed” by 6.2% in less than half a day.
• August 12, 2021: US PPI is higher than expected, which is positive for currency and negative for gold. XAU has fallen by 0.5% and surged 0.75% later that day.
• September 1, 2021: OPEC+ reconsider oil output increase by 400 000 barrels per day. Negative ADP NFP data (330K actual vs. 695K expected). Gold price has remained the same.
• September 3, 2021: US NFP three times worse than expected (235K vs. 720K). XAU has risen 1.15% in the next 3 hours, but in the next 3 days, gold had fallen more than 2%.

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.

What to expect from gold?

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. 

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Eduard Melkostupov

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