Markets are arranged as trends are replaced by consolidations and consolidations give way to new trends. Gold has clearly lagged behind in the $1100-1350 trading range per ounce, hence the exit from it became the logical realization of the nature of the market. Since the beginning of May, the 10% rally of the precious metal coincided with an increase in geopolitical tensions. The negotiations between the US and China suddenly broke down. Meanwhile, the US increased the size of the import-related imports of the Middle Kingdom and the confrontation between Washington and Tehran aggravated after an attack by oil tankers and a downed US drone. As a result, the XAU/USD quotes soared to the maximum mark for the last 6 years and the rally may well continue.
According to Goldman Sachs, gold can grow to $1,600 per ounce against the background of the completion of the economic cycle in the United States and the associated weakening of the dollar. Yes, the Fed will not necessarily be led by Donald Trump and will lower the federal funds rate in July. But due to the slowdown in the American economy, this will have to be done sooner or later. The derivatives market is 100% sure of the easing of monetary policy at the next FOMC meeting and gives a 40% chance of a 50 bp drop in interest rates.
The Fed is responding to a potential slowdown in the global economy, while central banks, not wanting to strengthen their own currencies, are competing to do the same. As a result, the rate on monetary units looks losing and investors increase the share of precious metals in portfolios. By the end of the week on July 18, financial managers had increased their net longs in gold to the maximum value since February 2018. At the auction on June 21, capital inflows into the largest specialized exchange fund SPDR Gold Shares amounted to $1.6 billion, which is a record figure since the creation of this ETF in 2003.
SPDR Gold Shares Capital Flows
Along with the gradual refusal of investors from the dollar and other currencies, the support for the XAU/USD "bulls" has a fall in bond yields. For the first time since 2016, the rates on 10-year US Treasury bonds fell below 2% and their German and Japanese counterparts are negative. In general, the capitalization of the global debt market with a yield below zero jumped to $13 trillion. Gold is not in a position to compete with bonds if the rates on them grow as it does not bring interest to income. On the contrary, if the rates fall, the precious metal begins to enjoy increased popularity.
Thus, the economic events including the depreciation of the US dollar, the weakness of its main competitors due to the ultra-soft monetary policy of central issuers, the fall in rates on the global debt market and the growth of geopolitical tensions create a favorable environment for gold. Its ability to continue the rally will depend on the results of the Donald Trump-Xi Jinping meeting. A breakthrough in the negotiations will boost the yield of US bonds and strengthen the dollar, which will result in a correction of XAU/USD. Other scenarios will allow the bulls to increase their advantage.
Technically, a regular rollback followed after reaching the target for the "Wolfe Waves" and AB = CD (200%) patterns. While the precious metal quotes are holding above $1,398 per ounce (23.6% of the CD wave), buyers are in complete control of the situation.
Gold daily chart
