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Despite the rapid return of gold to the psychologically important mark of $1,500 per ounce, there is no doubt about the strength of the upward trend. The precious metal continues to flow from East to West, and this is a sure sign of the strength of the "bulls". In India, demand for the physical asset grew from a modest 9% from January to June, although jewelers at the beginning of the year seriously considered the possibility of a sharp increase in sales after a sluggish interest in gold in 2017-2018. Nevertheless, high prices and taxes, a slowdown in economic growth and floods in South Asia make their expectations high. Demand for ETF products, by contrast, is growing by leaps and bounds. Stocks of specialized exchange funds reached the level of 2425 tons, the highest since 2013. This is 1000 tons more than the lowest level since the global crisis that took place in 2016.
Gold ETF Stock Dynamics
The main reasons for the 15% XAU/USD rally since the beginning of the year are concerns about the recession of the US economy, trade wars and the related decline in bond yields around the world. The scale of the negative-yield debt market jumped above $16 trillion. Gold is not in a position to compete with interest-bearing bonds, however, if rates fall, the share of precious metals in investment portfolios begins to grow.
Fears of a slowdown in global GDP are also an important driver of XAU/USD growth. In such conditions, central banks use a soft monetary policy, which leads to a weakening of their currencies. If the Federal Reserve, contrary to the strength of the US economy, continues to lower rates, the US dollar will come under pressure, which will allow gold to restore an upward trend. Goldman Sachs estimates prices will rise to $1,600 an ounce over the next 6 months, and SP Angel warns that if China intervenes in Hong Kong, they could jump $100 in a moment.
In my opinion, if it were not for the return of investor interest in the US dollar, the precious metal would not get tired of rewriting 6-year highs. These assets traditionally go in different directions due to the fact that gold is traded in US currency. The future prospects of the USD index will be clarified by Jerome Powell, who has a difficult task in Jackson Hole - to explain the general position of the Fed, which is divided: "doves" say that in order to consolidate inflation at 2%, it was necessary to reduce the rate not by 25 but by 50 bp in July, "hawks" - that a weakening of monetary policy is not required. The central bank should look at its country and not try to save the global economy.
Although there is an opinion on the market that Powell's dovish rhetoric in Jackson Hole will be a negative for gold, as it will allow US stock indices to recover, in my opinion, everything will be the other way around. In this situation, the US dollar will weaken, and XAU/USD will go up.
Technically, while futures quotes are staying above $1,450 an ounce, bulls continue to control the market situation. Updating the August high will increase the risks of aiming for 161.8% and 88.6% in the AB = CD and Bat patterns.
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