Unless the US currency loses its trump card, the precious metal will be trading in a bearish market

Investors continue to be puzzled over the question of why gold ceased to perform the functions of a safe haven asset. Traditionally, during periods of escalation of geopolitical conflicts, the precious metal was like a fish in water, but in 2018 it lost about 9% since the beginning of the year. Neither the US trade war with China, nor the financial crisis in Turkey, nor the victory of Eurosceptics in Italy, nor Brexit support the XAU/USD bulls. Non-commercial accounts, including hedge funds, asset managers and trading groups, brought the net short position on gold to its high since 2001.

The main culprit of all the troubles of the precious metal is considered to be the American dollar. Their 120-day correlation is -0.6, the largest indicator for all assets of the commodity market. For comparison, the relationship between gold and 10-year US Treasury bonds is estimated at -0.2%. Capital Economics notes that the historically, the asset ignored the favorable geopolitical background in case the USD index grew. For example, the precious metal started its rally not at the very beginning of the last global financial crisis, but only at the end of 2008.

Dynamics of gold and the US dollar

Source: Bloomberg. 

In my opinion, we cannot say that gold has lost its status as a safe haven asset, since if it is denominated in other currencies, high demand still exists. Investors are sensitive to the acceleration of the US economy to 4.1% q / q in the second quarter and continue to get rid of ETF products. The dynamics of their reserves on the whole quite accurately reflects the change in prices, however, in my opinion, the primary factor is the cost of the precious metal.

Dynamics of the prices for  gold and ETF stocks

Source: Bloomberg.

According to the World Gold Council, the worst demand for the asset over the past almost 10 years is connected with the outflow of capital from specialized exchange funds. The second largest consumer of metal - India - imports less than before, which suggests that the connection between low prices and high demand does not work. In fact, the 9% devaluation of the rupee from the beginning of the year is to blame.

What's next? Gold took the information about the negotiations between China and the United States pretty well. De-escalation of the conflict deprives the dollar of an important trump card, but it is too early to talk about the end of trade wars. There is no reason to expect either a slowdown in the US GDP or an end to the normalization cycle of the Fed's monetary policy. A leading indicator from the Atlanta Federal Reserve Bank predicts that the US economy will grow by 4.3% q / q in July-September, and the futures market will give a 66% chance of four federal funds rate increases in 2018. To reduce these indicators, we need a package of disappointing macroeconomic statistics from the States.

It should be borne in mind that the alleged problems of the greenback will not do its competitors any good. The growth of political risks in Italy and the talk about the need for the prolongation of the European QE make the euro's positions vulnerable. Thus, despite the rebound in the direction of $ 1,190-1,200 per ounce, gold continues to trade in a bearish market. The growth of its quotations can be used for sales.

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Price chart of XAUUSD in real time mode

Dollar has pinned gold to the mat

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. 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 2004/39/EC.

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