Reduced geopolitical tensions and a rise in global risk appetite contributed to a fall in gold prices by 5% from February highs levels. Stocks of the largest specialized fund, SPDR Gold Shares, were reduced to 752 tons, which is the minimum mark in six months. The precious metal was in disgrace against the background of the continuous growth of world stock indices and increases the yield of US Treasury bonds and the remarkable stability of the US dollar. Contrary to the intentions of the Fed to make a long pause in the process of normalizing monetary policy and a portion of disappointing macroeconomic statistics, the USD index is not eager to go for a correction.
Events such as the prolongation of the transition period in the framework of Brexit until October 31, the good news from the US and China negotiations and strong data on China's GDP, retail sales and industrial production only fueled a global appetite for risk. In an environment where stocks are rising and volatility on Forex falls to its lowest level since 2015, safe haven assets fall into a wave of sales. Suffice to recall how the Japanese yen and the Swiss franc feel were ignored.
Optimism from the eurozone and China allows investors to hand off treasury bonds which leads to a rebound in the yield of 10-year securities from the area of 16-month bottom. Unpleasant news for gold, which does not pay interest and in turn was not able to compete with debt obligations during the period of growth of interest rates on them.
Dynamics of gold and yield of US Treasury bonds
Not less than troubles are XAU / USD "bulls" who delivers the stability of the US dollar instead of falling against the background of the "dovish" rhetoric of the Fed and weak statistics on industrial production. The US currency stabilizes at current levels, adopting an increased probability of maintaining the federal funds rate at 2.5% in 2019 from 40% to 60%. The Chicago Fed Chairman Charles Evans believes that the Fed will tighten monetary policy in 2020 and 2021 and Deutsche Bank does not expect a recession over the next three years. If the US economy is still strong, what's the point of buying bonds? They get rid of them which leads to an increase in profitability and promotes sales of precious metals.
What's next? In my opinion, the US dollar will be affected if China and the eurozone take the path of a V-shaped recovery, and trade wars stop. Euro and other world currencies will be able to go on the attack, which will lead to a correction in the USD index and return the bulls in XAU/USD to the game. I do not think that the rates of the global debt market will go far up. This requires a change in the worldview of central banks and to turn from "hawkish" to "dovish", and then from "dovish" to "hawkish" within six months is not so easy.
Technically, the target of 161.8% for the subsidiary and maternal AB = CD patterns makes it possible to reveal a convergence zone of $1254-1262 per ounce, which is near where the gold is capable of finding the bottom. If the bulls manage to return quotes to the middle of the consolidation range of $1282-1310, the risks of restoring the uptrend will increase.
Gold daily chart
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