Until recently, gold held up well despite rising Treasury yields and a stronger US dollar. When both factors turned in its favor, XAU/USD unexpectedly fell. What caused the drop? Let's discuss this topic and outline a trading plan.
The article covers the following subjects:
Major Takeaways
- Gold is being sold off along with stocks.
- The Brent rally is putting pressure on the XAU/USD pair.
- The long-term outlook for gold remains bullish.
- Consider buying gold if it settles above $4,010.
Weekly Fundamental Forecast for Gold
The sell-off in tech stocks and the ongoing Brent rally now weigh more on gold than falling Treasury yields and a weaker US dollar. The precious metal is on track for its worst week in four months. Since buyers could not keep XAU/USD above an important psychological level, the risk of a deeper decline has increased.
Weekly Gold Price Movement
Source: Bloomberg.
Gold has not acted as a hedge against inflation for quite some time. In 2022, US inflation climbed above 9%, yet the metal failed to benefit. It was more sensitive to the Fed's sharpest rate hikes in forty years than to the rise in the CPI.
When interest rates are high, gold trades like any other investment asset, so it makes little sense to use it as an inflation hedge. A better approach is to buy the commodities that drove consumer prices higher in the first place, such as oil. Brent's rally above $114 per barrel has raised concerns that PCE inflation will stay well above the target. As a result, the Fed may hold rates in October and then raise the federal funds rate by 50 basis points in December, which would weigh on the XAU/USD pair.
Because gold behaves like an investment asset, it comes under pressure when US stock indices fall. Investors sell the metal to free up liquidity and meet margin requirements on their stock holdings. Consequently, the increase in Brent prices struck two weak spots for XAU/USD at the same time. First, it raised concerns about mounting inflation and a faster pace of Fed tightening. Second, it reduced global risk appetite, putting pressure on both the S&P 500 index and gold.
Gold Price vs. Treasury Yields
Source: Bloomberg.
In this environment, falling Treasury yields actually work against XAU/USD. Investors looking for a safe haven are choosing Treasuries over both the US dollar and precious metals. As a result, gold is once again left out of investment portfolios.
However, the best way to make money is to use panic as an opportunity. What will high oil prices and disappointment in AI technologies lead to? Most likely, a slowdown in the US and global economies. Under such conditions, the Fed is more likely to lower rates than raise them, so the long-term outlook for XAU/USD remains bullish. The key question is how soon the precious metal will get back on its upward path.
Weekly Trading Plan for Gold
If gold fails to hold above $4,010, it may keep falling until the FOMC meeting. Neutral rhetoric from the Fed will provide an opportunity to buy. If the price settles above this key level, long trades can be opened right away.
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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