Gold has fallen into a wave of general euphoria over the bright future of commodity assets. Following oil, copper, and other commodities, precious metals are growing for the 4th day in a row on expectations of a large-scale fiscal stimulus and the associated acceleration of inflation. Investors are betting that a cocktail of increased money supply, central bank reluctance to thwart strong economic recovery, and post-pandemic consumer spending boom will fuel CPI. Moreover, such factors as the cheap labor force in China and globalization, which restrain the growth of consumer prices, are most likely a thing of the past.
Dynamics of inflationary expectations in the USA
According to Goldman Sachs, it is easy and largely correct for investors to imagine themselves in the commodity market forecast. This is the V-shaped trade in vaccines. The sooner humanity develops collective immunity from COVID-19, the faster economies will open up, the worse the US dollar will have. The combination of a weak dollar and high inflation is an explosive combination for gold. Precious metals are traditionally used as a hedge against price risks. It is quoted in dollars, so a fall in the USD index usually leads to an increase in XAU/USD quotes.
Gold is supported by the potential growth in jewelry demand in China. Due to the low base last year (by the end of 2020, it decreased by 35% to the lowest level since 2009), the indicator is expected to skyrocket. Although there are rumors in the market that interest in jewelry industry products will be lower than in 2019 due to the occasional outbreaks of COVID-19.
Dynamics of Chinese demand for jewelry
Thus, against the backdrop of general euphoria over the seasonal slowdown of the pandemic (the number of people infected with coronavirus in the world has been declining for the 4th consecutive week), the active introduction of vaccines and the imminent adoption of a large-scale fiscal stimulus in the United States, which leads to acceleration of inflation and a weakening of the dollar, XAU/USD quotes are growing by leaps and bounds. The further fate of the precious metal is in the hands of the Fed. Is the Central Bank ready to tolerate inflation for as long as it promised before? If so, gold has a good chance of bouncing above $1,900 an ounce.
Indeed, the falling USD index and slowly rising Treasury yields allow the XAU/USD bulls to carry out rapid attacks. It will be another matter if the officials of the Federal Reserve start talking, as in January, about curtailing QE by $120 billion a month. In this situation, the US debt market rates will actively go uphill, the dollar will strengthen, which will become a tub of cold water for gold.
Technically, a Broadening Wedge pattern has been formed on the daily chart of the precious metal. Trading on its basis implies the need to wait for the signal in whose hands the initiative is located. As a rule, the growth of asset quotes above the levels of 78.6% and 88.6% of wave 4-5 indicates that the market is dominated by bulls. In the case of gold, the breakout of the resistance at $1860 and $1870 per ounce is a reason to buy. On the contrary, a drop in quotes below $1810-1815 is a signal for selling.
Gold, daily chart
