Historical parallels with 2022 suggest that XAU/USD could rally amid falling oil prices, even if the Fed raises interest rates. However, Brent is unlikely to decline while the Strait of Hormuz remains blocked. Is gold doomed? Let's discuss this and outline a trading plan.
The article covers the following subjects:
Major Takeaways
- China will not stop buying Iranian oil.
- The Fed may raise rates as early as 2026.
- XAU/USD will start rising if Brent declines.
- Short positions in gold, with targets of $4,400 and $4,300, remain relevant.
Weekly Fundamental Forecast for Gold
The summit in Beijing appeared to be the only barrier holding back a wave of Treasury sell-offs and US dollar buying. The assumption that others could decide Tehran's future proved wrong. As a result, the conflict in the Middle East is likely to continue. China's refusal to stop purchasing Iranian oil triggered another surge in dollar demand and Treasury selling. The USD index surged to monthly highs, while Treasury yields climbed close to yearly peaks. Under such conditions, gold remains under pressure.
The longer the confrontation between the US and Iran continues, the more parallels emerge with the beginning of the military conflict in Ukraine. There are simply too many similarities. Not only oil prices but also US inflation have returned to 2022 levels. Following a 3.8% rise in consumer prices and a 6% increase in producer prices, import prices surged to four-year highs.
US Import Price Dynamics
Source: Bloomberg.
Combined with strong retail sales data, this allowed the futures market to raise the probability of monetary tightening in 2026 to 50%. Indeed, when the economy remains strong, the labor market is stable, and inflation risks accelerating further, the Fed is expected to pursue a tighter monetary policy.
In 2022, the central bank began its tightening cycle as early as March. At that time, GDP was expanding rapidly, while inflation was approaching 10% amid the recovery from the pandemic-related recession. Gold initially fell by 20% from February to October before beginning a steady recovery.
Gold and Federal Funds Rate Dynamics
Source: Trading Economics.
At that time, support for the precious metal came from both central bank bullion purchases following the freezing of Russia's foreign exchange reserves and the redirection of Russian oil exports from Western markets to Asia. The market adapted, and Brent prices began to decline. Investors concluded that the inflation spike would be temporary, meaning the Fed's tightening potential was limited. Why not buy gold under such conditions?
Oil and Gold Trends
Source: Trading Economics.
Today, Brent remains far from a serious decline. On the contrary, oil prices could rise even further due to the Strait of Hormuz blockade and declining global inventories. Meanwhile, the sell-off in gold could continue amid accelerating US inflation and growing expectations of Fed monetary tightening in 2026.
Unfortunately, expectations that the Middle East conflict would be short-lived, as the White House had suggested, did not materialize. Under that scenario, gold's recovery would have started earlier. Now, it risks being postponed indefinitely. The main reason is the rise in Treasury yields and the US dollar, both of which are unfavorable for XAU/USD.
Weekly Trading Plan for XAU/USD
In my view, it is still too early to buy gold. As long as the precious metal trades below $4,600 per ounce, the focus should remain on selling XAU/USD with targets at $4,400 and $4,300.
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
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