16.10.201913:31 Forex Analysis & Reviews: Gold bets on ETFs

A strong dollar and growing global risk appetite amid a truce in the trade war and progress in the relations between Britain and the EU launched a wave of correction for XAU/USD. Nevertheless, demand for ETF products remains high, and gold flows from the East (China, India) to the West (USA, Europe), which in former times testified to the prevailing "bullish" trend in the market. According to Standard Chartered Bank, the average price of the precious metal in the fourth quarter of 2019 and 2020 will be $1510 and $1570 per ounce. Retail investors should have their say in the development of the upward trend.

Despite the pullback of XAU/USD, the inflow of capital into specialized exchange-traded funds continues for the 19th day in a row. We are talking about the longest winning streak since 2009. ETF stocks have reached a new record of 2810 tons. In value terms, the indicator still falls short of the level of 2012, when gold was quoted near the mark of $1700 per ounce. At the same time, according to the forecasts of Metals Focus, the demand for the products of the jewelry industry of China will decrease in 2019 by 4% to 660 tons, the demand for investment coins and bullions – by 20% to 240 tons.

Dynamics of Chinese demand for jewelry, bullion, and coins

Thus, there is a rather paradoxical situation when interest in gold-focused ETFs is high and prices are falling. Something similar took place in 2011 when the precious metal began to decline from the levels of historical highs, and stocks of specialized exchange-traded funds continued to grow until 2013.

From a fundamental point of view, the main drivers of the XAU/USD peak are a strong US dollar, the proximity of the S&P 500 to historical highs, as well as a decrease in political and geopolitical tensions. Markets believed that Britain and the EU will be able to agree before October 31, and the States and China will eventually come to a consensus. Despite the reduction in the federal funds rate, the USD index is stable, which I attribute to the strong economy and the weakness of the main currencies-competitors of the "American". On the other hand, if the releases of data on retail sales and industrial production show a deterioration in the situation in the US, gold may rise.

Donald Trump is profitable to support the stock market, as history shows that the deterioration of its conjuncture is a negative factor for the current government. There are two ways. First, one can spread optimism about a future deal with China. Second, do not stop criticizing the Fed, pushing the central bank to weaken monetary policy. For sure, the White House will continue to use them, which will favorably affect the S&P 500 and increase the risks of a pullback of XAU/USD.

Technically, if the "bulls" on gold manage to return its quotes above $1500 and $1515, they will have the opportunity to play the "wolf wave" pattern. Its first target is located near $1545, the second – near the mark of $1590 per ounce. On the contrary, the exit of the precious metal beyond the lower boundary of the triangle will strengthen the risks of correction to $1440 – 1445.

Gold, the daily chart