Slowing inflation in the US is a sure way to boost gold prices. Oddly enough, the supposedly price-protective asset actually falls when inflation rises. What are the reasons? Let’s discuss it and make a XAUUSD trading plan.
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Fundamental gold price forecast today
The gold trend seems to have turned up. The precious metal price is quite responsive to monetary policy. Therefore, the facts that since the beginning of the year, the world's central banks, according to BofA research, have raised interest rates 275 times and reduced them only 13 times, and fifty regulators decided to take a giant step of 75 basis points at one meeting, resulted in XAUUSD drop by 22% from the March high to the November low. However, the Fed’s willingness to slow down the monetary tightening pace sent the gold price up.
2022 will go down in history as a year of paradoxes. Previously, the precious metal was considered an inflation protection tool. However, when prices were rising, gold was trading down. A slowdown in the US CPI encouraged the XAUUSD bulls to turn the trend up. Gold did not justify its status as a safe haven; the precious metal fell along with stock indices, transferring the function of a safe-haven asset to the US dollar. The negative correlation of gold with the dollar and treasury yields remained.
Dynamics of gold and US dollar
Source: Bloomberg.
In fact, gold is sensitive to the Fed’s reaction to high prices rather than to inflation itself. While the central bank was ready to sacrifice the economy to press down the highest prices in decades, XAUUSD fell following the US stock market, and the Treasury yield rose. Once Jerome Powell announced bilateral risks and the hope for a soft landing, everything changed.
Now stocks and bonds are moving in opposite directions. When everything is bad, investors buy bonds, and their yields fall. When everything is good, the demand for risky assets increases. Such a trend suggests that investors are now more focused on recession than inflation. The faster it comes, the longer it goes on, and the deeper it gets, the higher gold will rise. According to SaxoBank's forecast, the precious metal should rise to $3,000 in 2023 as money continues to flow into the precious metals market from the cryptocurrency market.
According to Goldman Sachs, gold is a better tool for diversifying an investment portfolio than bitcoin. It is more resistant to tightening financial conditions and is less speculative.
XAUUSD reacts to US dollar price changes and to the moves in Treasury yields. Furthermore, inflation is slowing down along with the Fed’s monetary tightening pace. Therefore, the gold price should continue rallying up unless the US consumer prices start growing again.
XAUUSD trading plan today
The US CPI report will determine the XAUUSD trend. If inflation goes down lower than the expected 7.3%, one could consider entering longs with targets at 1815 and 1830. Otherwise, if the price growth rate is above 7.4%, it will be relevant to sell down to 1777 and 1772.
Price chart of XAUUSD in real time mode
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