Average inflation levels have risen significantly in recent years, leading to higher interest rates. Gold had previously resisted these headwinds, but the conflict in the Middle East has deprived it of key advantages. Let's discuss this topic and outline a trading plan for XAU/USD.
The article covers the following subjects:
Major Takeaways
- The external backdrop remains unfavorable for gold.
- The Fed's cautious stance is supporting XAU/USD.
- The outlook for the yellow metal depends on developments in the Middle East.
- A breakout below $4,455 would be a signal to sell gold.
Weekly Fundamental Forecast for Gold
Gold managed to recover after the sell-off in mid-May but remains under pressure. Global bond yields are at their highest levels since the 2008 global financial crisis, while the strong US dollar continues to weigh on XAU/USD. The precious metal does not generate interest income and therefore struggles to compete with Treasuries when yields rise. Gold is priced in US dollars, which creates an inverse correlation with the currency.
Global Bond Yield Dynamics
Source: Bloomberg.
Investors are shocked by the rally in bond yields, but the real question is why they did not rise earlier. Government borrowing, especially in the US, has reached unsustainable levels. At the same time, corporations are issuing record volumes of bonds to finance investments in artificial intelligence, while inflation in recent years has remained above historical averages.
Inflation could accelerate even further if the conflict in the Middle East drags on and the Strait of Hormuz is blocked. Donald Trump opposes both Tehran's new rules governing transit through the Strait of Hormuz and Iran's decision to keep its enriched uranium inside the country.
US Inflation Trends
Source: Bloomberg.
For now, the Fed argues that monetary tightening cannot effectively offset rising energy prices. This allows gold to stabilize on expectations that the federal funds rate will remain unchanged for an extended period.
Nevertheless, it is important to understand that the era of low interest rates is over. Gold benefited significantly from the low-rate environment, particularly through the debasement trade. Before the conflict in the Middle East, expectations of monetary easing by the Fed and other central banks supported XAU/USD. Times are changing.
Russia's Gold and Foreign Exchange Reserves
Source: Bloomberg.
Will strong central bank bullion purchases remain another key support factor for gold? Goldman Sachs believes so. The bank expects monthly central bank gold purchases to increase from 50 to 60 tonnes in 2026. On the other hand, Russia's gold and foreign exchange reserves declined by 900,000 ounces to 73.9 million ounces in January–April. Based on average prices, Moscow generated $4.3 billion from these sales.
In my view, gold prices continue to depend on geopolitics. Tensions between the US and Iran remain high, increasing the risk of further escalation and continued gains in Brent crude. Under such a scenario, the risks of a decline in XAU/USD will increase. However, anything is possible, and a potential agreement between the parties could support the precious metal.
Weekly Trading Plan for XAU/USD
Under such conditions, a decline in gold below the local low at $4,455 per ounce would justify adding to existing short positions.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of XAUUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance broker. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2014/65/EU.
According to copyright law, this article is considered intellectual property, which includes a prohibition on copying and distributing it without consent.
