Strategies of buying XAU/USD on fall are still working
You’d better mend ammunition before you attack. After gold price had reached its 6-week high, it made a step back, expecting the report on the U.S. employment for November. The data may be rather strong, but it won’t indicate the most important factor – potential slowdown in the U.S. economy growth. That is why the success of the biggest gold opponent is going to be temporary. Victory results from patience.
It is one step between the grand to the ridiculous. Investors were appealed by the greenback in the April-November period. However, once there is a hint at a possible decline in the U.S. GDP rate and slower normalizing of the Fed’s monetary policy, they are thinking of selling it. Just 13 month ago, the dollar was supported by Treasury yields, but only short-term bonds are going up in December, which the evidence that the market is confident in further rate hikes in December. At the same time, lower yield on long-term securities signals strong doubts in prosperous future of the U.S. economy
Dynamics of U.S. Treasury yields
Source: Wall Street Journal
The drop in the USD rate, Treasury real yield (let’s base on the assumption that the U.S. inflation is stable) and the stock indexes is a dangerous mixture for the XAU/USD bulls. It is excellent environment for gold price increase. Even since Donald Trump will in any way support the U.S. equity market by tweeting about easing of the U.S.-China trade tensions and criticism of Jerome Powell. Everybody knows that gold is falling as it gives out its safe-haven status to the greenback during the period of trade wars and tightening the Fed’s monetary policy. If the dollar has lost both advantages, why shouldn’t gold go on rallying?
I must note that the federal funds rate hasn’t always been a negative factor for gold. For example, in the 2004-2006 period, borrowing cost was up at 5.25%, and gold value was up by 59%. Since the current monetary normalization cycle started in 2015, futures price has been 15% up. In my opinion, the reason is in the monetary policy of the central banks, competing with the Fed, and in the dollar response to its changes.
Dynamics of gold and federal funds target rate
After all, the strategy, popular in 2015-2018, to sell XAU/USD ahead the FOMC meeting, where the rate is likely to be increased, and to buy it next, in fact, may work out in December. With this respect, it looks natural that the pair is down ahead the important event.
I believe the middle- and long-term gold outlook to be bullish. So, it makes sense to buy it on the fall with targets at 1265 and 1290 dollars an ounce. Further evidence is that seasonably good period for gold is getting closer. Since 2009, in the January-February period, gold was adding 5% in value on average. NAB suggests that it is because India and China are buying more physical gold at this time. But I still believe that the same period features traditional slowdown in the U.S. economy expansion due to cold weather.
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Price chart of XAUUSD in real time mode
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