Suddenly, the US Dollar Index fell 6.70% over the last two weeks, marking the biggest decrease in the currency since 2020.
Gold Isn't Saving Investors From Inflation
2022-10-17 • Updated
On Thursday, September 15, XAUUSD lost its major support, which used to limit the downside since April 2020. The decline happened amid expectations of more aggressive Federal Reserve interest rate hikes due to higher-than-expected US inflation.
Why is gold falling?
Investors treat gold as a hedge against inflation. A rise in inflation or inflationary expectations increases investors’ interest in purchasing gold and drives up its price. In contrast, disinflation or a drop in inflationary expectations does the opposite.
Gold and inflation expectation. Source: Chicagofed
However, we can notice that since the 2000s, the gold price has been rising while the inflation expectations were steadily low. It was caused by the Fed monetary policy, according to which the Federal Reserve has been printing USDs to support the economy. As a result, the amount of USD in circulation increased parabolically, pushing gold prices to new highs.
USD in circulation. Source: FRED
Moreover, gold is sensitive to expected long-term real interest rates. Since metal is a long-duration durable asset, its price has a strong inverse relationship with the long-term real interest rate. A rise in expected real rates should drive down the price of gold.
Therefore, central banks' rate hikes and the Fed's quantitative tightening (QT) monetary policy make gold one of the most unpopular assets among big investors. Holding the metal doesn't provide any dividends or payouts, while big hedge funds have to show a profit to investors. Therefore, smart money prefers short-term government bonds to gold, as yields skyrocketed to 15-year highs.
US 3-month Government Bond Yield. Source: Tradingview
What to expect?
While the consensus is a 75-basis-point hike on September 21, some Fed members call for a 100-basis-point increase. The gold market reflects such a prospect. As a result, an actual rate hike by 75 bps may be a positive surprise for the yellow metal.
XAUUSD, weekly chart
After the breakout, primary support levels for XAUUSD are 1530.00, the horizontal level from May 2012, and 1435.00, 161.80 Fibonacci level. The range between 1680 and 1705 acts as the massive resistance for the price since the breakout.
In the short term, the price might increase inside the resistance range to confirm the breakout. However, I expect a massive decline towards the support levels in the middle term.
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Usually, the Dollar and GOLD are negatively correlated. This means that the stronger the US-Dollar becomes, the lower Gold prices will be as many more investors will prefer liquid investments. Times of crises and the need to safeguard funds are the major exceptions to this.
US dollar gains ahead of the US CPI data on July 13th, pressing gold to new lows!
Let's start off with a look at the Daily timeframe on Bitcoin. We currently see price reacting to the rally-base-rally demand zone between the 15,600 - 14,300 price area. Price also seems to have found support off the trendline support as marked in the image above. Interestingly, this means the overall bias on BTCUSD is Bullish.
Central Bank Digital Currencies (CBDCs) are virtual national money. The idea of creating such currencies came to the authorities after the success of cryptocurrencies, which also exist only in digital form.
The views here are solely based on Technical Analysis techniques using my personal Smart Money approach. Hence, it is important to understand that the trading of CFDs comes at a risk; if not properly managed, you may lose all of your trading capital. To avoid costly mistakes while you look to trade these opportunities, be sure to do your own due diligence and manage your risk appropriately.