For the first time since March, the metal is ready to close the month in the green zone

Gold that pushed the gas pedal after the breakthrough of the resistance at $ 1215 per ounce, decided to hold back the horses by the end of October. After covering short positions, whose net value for the week to October 23 was reduced to its lowest level since mid-July, hedge funds and financial managers began to look for drivers that will allow the precious metal to continue the journey north. They can be the development of a correction in the US stock market, a slowdown in US economic growth, as well as a reduction in the rate of normalization of the Fed’s monetary policy.

While in October, gold is likely to be able to close the month in the green zone for the first time since March, US stock indices show the worst performance since 2009. When stocks rise, there is not much point in buying precious metals. The correction forces investors to diversify portfolios in favor of assets, which allow to hedge the risks of rising volatility. That fear, according to Goldman Sachs, made the XAU/USD grow. The bank assesses the chances of a recession in the US economy over the next two years as fifty-fifty, predicts a slowdown in GDP from 2.9% to 2.6% and acceleration of core inflation to 2.5% in 2019. This combination of key indicators is a precursor to the end of the economic cycle that should support gold.

The ETF fans and central banks, who increase precious metal reserves, have caught the change in market sentiment perfectly, which also contributes to the rise in prices. According to MKS estimates, if futures quotes rise above $ 1,245 per ounce, then short sellers will throw a white flag and be ousted from the market, which will increase the risks of a new impulse in the upward movement of the XAU/USD.

Dynamics of SPDR Gold Shares

Source: Financial Times.

Dynamics of gold reserves of central banks

Source: Bloomberg.

In my opinion, in order to predict the future dynamics of the asset being analyzed, we need to use old drivers: the US securities market conjuncture, as well as the position of the American dollar. Given the slowdown in GDP, the tightening of financial conditions and the revaluation of the greenback, I don’t think that in the near future S&P 500 will be able to rewrite historic highs, if at all.

Bloomberg, citing competent sources, states that if there is no breakthrough at the November meeting of the presidents of the United States and China, Washington will extend the duty to the value of China's total import. Certainly, a part of the cost increase will be passed on by the American producers to consumers, which will increase the risks of a slowdown in GDP. In general, an unfavorable geopolitical background will not allow us to seriously expect a continuation of the rally in the yield of treasury bonds, which is a bullish factor for gold.

As for the greenback, its growth cannot last forever. If inflation does not want to go far from the target, the Fed will not have much reason to move to a moderately tight monetary policy. Slowing the normalization process will force investors to take profits on the US dollar and push quotes of futures for the precious metal to $ 1,265-1270 per ounce by the end of 2018.


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Price chart of XAUUSD in real time mode

Gold is holding its horses

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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