20.09.202311:55 Forex Analysis & Reviews: Gold maintains stability despite strong headwinds

If the market doesn't go where investors expect it to, there's a greater likelihood that the market will go in the opposite direction. Such an unfavorable external environment for gold hasn't been seen in a long time. The strong U.S. economy amid stagflation in Europe gives the green light for a rally in the U.S. dollar. Meanwhile, the rise in the yield of 10-year Treasury bonds to 16-year highs would seem to suggest that XAUUSD should sink. However, the precious metal holds its ground. This circumstance sets a bullish tone for its supporters.

Despite the lowered global GDP forecasts, the OECD has improved its outlook for the U.S. economy. The Paris organization sees it growing by 2.2% in 2023, which is higher than the July estimate of 1.8%. The forecast for 2024 has been raised by 0.3 percentage points. Pessimism about the global economy is bad for pro-cyclical currencies, including the euro. At the same time, optimism about the strength of the U.S. GDP allows the U.S. dollar to feel like a king in the Forex market and gives Capital Economics a reason for bearish gold forecasts. The company sees gold falling to $1,800 per ounce.

However, the precious metal never ceases to amaze. Alongside a strong dollar and rapidly rising yields on U.S. Treasury bonds, another nail in its coffin was expected to be the fact that capital has been flowing out of gold-oriented ETFs by 5% since the beginning of the year, according to Bloomberg estimates. Yet, since May, quotes have been trading in the $1,900–2,000 per ounce range. As a result, volatility is decreasing, and trading XAUUSD is starting to look dull.

Dynamics of Gold Volatility

What is the reason for the remarkable resilience of the precious metal in the face of headwinds? In 2022, one could point to active central bank purchases, which reached record levels. But in 2023, their demand for gold has decreased. The difference is that it is growing in China. The cancellation of import tariffs led to a surge in Shanghai Exchange premiums compared to London, reaching a record $120 per ounce.

Dynamics of Gold Premiums in China

However, interest in physical assets usually plays a secondary role due to the different scales of the market. The futures market is much larger, which makes the precious metal react to macroeconomics and the Federal Reserve's monetary policy.

XAUUSD bulls may continue to believe in a recession in the United States. Perhaps the Federal Reserve will lead the American economy to a soft landing, but it won't be able to prolong it for long. In the context of a strong GDP, inflation will rise, prompting the central bank to resume the monetary tightening cycle and ultimately triggering a downturn.

Therefore, despite temporary difficulties, such as the strengthening of the U.S. dollar in response to hawkish Fed rhetoric, gold will be able to endure.

Technically, the bulls for the precious metal failed to establish themselves above the pivot level at $1,931 per ounce, indicating their weakness. Nevertheless, a return of quotes above the local high at $1,937 or a rebound from the fair value at $1,916 per ounce should be used to form long positions.