What factors affect the XAUUSD? Capital flows in ETFs? Chinese and Indian imports? The Fed’s monetary policy? Only the answers to these questions will help us forecast gold prices. Let’s discuss them and make a trading plan.
Quarterly fundamental forecast for gold
Although gold and oil both belong to commodities, their pricing factors are different. Brent and WTI’s price is subject to global demand and supply, while the cost of gold depends on investment flows, the USD, and US yields. The latter three factors are controlled by the Fed, so expectations of a federal funds rate hike to 5% in 2023 have dropped XAUUSD quotes to their lowest since March 2020, unsurprisingly.
In oil terms, outflows from gold ETFs — for six months in a row — are a bearish factor for gold. Holdings in the funds reduced by 12.5 tons on 19 October, the biggest daily decline since March 2021, suggesting even a faster shrink this month. On the contrary, growing gold exports from Switzerland to China and India and the largest exports to Turkey since April 2013 are bullish factors for gold. It looks like the XAUUSD’s consolidation on paper, but those who have kept an eye on the gold market for a long time do not agree. When gold exports go from the West to the East, a stable downtrend suggests itself.
The fate of gold has always been under the Fed’s control. According to Goldman Sachs, there’s a 30% chance that the central bank will drive a soft landing in the current monetary tightening cycle. If so, gold will collapse to $1,530 an ounce. Also, Goldman Sachs says there’s a 20% chance the Fed will continue to raise rates despite recession. That would be the worst scenario for gold as the precious metal would then collapse below $1,500.
Conversely, the following two scenarios are favorable to the bulls. A deep decline in the US economy would drive the Fed to drop borrowing costs to zero and skyrocket the XAUUSD to $2,250. Unless rates fall so deeply, the maximum gold can hope for is $2,000 an ounce. The chances of those two scenarios are estimated at 30% and 20%, respectively.
The first scenario looks the most viable amid the labor market’s stability and inflation, unwilling to slow down. In such conditions, treasury yields and the US dollar grow while gold falls.
Gold and the USD charts
Source: Bloomberg.
I agree with Goldman Sachs, even if the bank attempts to put up a good front. Its long-term forecast being gold’s comeback above $2,000 an ounce, the bank is now preparing a “route of retreat,” referring to unfavorable scenarios.
Quarterly trading plan for gold
The XAUUSD’s downtrend may continue as the US economy remains stable and the Fed is still willing to crush inflation, which is at its highest levels over decades. In such conditions, traders should continue selling gold on pullbacks or important support breakouts. I recommend holding and occasionally building up shorts opened at $1,660 an ounce. The targets are at $1,590, $1,560, and $1,525.
Price chart of XAUUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. 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.
