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When there are too many "bulls" in the market, it's time to think about selling. The surge of XAU/USD to record highs has generated numerous optimistic forecasts. Supposedly, in 2024, gold may not only consolidate above $2,100 per ounce but also grow to $2,300. All of these predictions were made not because of, but in spite of. In spite of the fact that the U.S. economy remains strong, which is unfavorable for safe-haven assets. Contrary to the fact that inflation is slowing down, and precious metals are traditionally perceived as protection against high prices. Contrary to market sentiment. And now it's time to pay the price.
Investors seem to have ignored the rise of XAU/USD above 2,145. They continue to divest from ETF products for the sixth consecutive month. The reserves of specialized exchange-traded funds are rapidly shrinking, depriving gold bulls of key support. Typically, an upward trend is confirmed by high investment demand.
Dynamics of Gold ETF Reserves
The basis of investors' interest in precious metals lies in its ability to hedge recession risks. However, this ability should be considered in the context of the entire portfolio. Gold is used as a tool for its diversification. Thus, amid the panic selling of the S&P 500 during the pandemic-induced downturn in 2020, XAU/USD quotes also fell. Traders sold gold to support losing stock positions.
Now, there is no need for that. On the contrary, the fear of missing out on profit from the rally of the broad stock index forces investors to sell precious metals to use the proceeds to buy even more securities. The blame is on the Goldilocks regime when inflation is slowing down rapidly, and the economy continues to grow. Perhaps not as fast as before. The fate of XAU/USD depends on what will happen to it.
The World Gold Council outlines three scenarios. In the case of a soft landing of the U.S. economy, the Fed will not rush to raise the federal funds rate. As a result, gold will stabilize. Conversely, a hard landing implies aggressive monetary expansion, which will be a catalyst for a rally in precious metals. Finally, in the "no landing" scenario, when the U.S. GDP continues to grow above the trend, XAU/USD quotes will go down. However, WGC assigns only a 10% chance to the latter scenario.
TD Securities remains bullish on gold but urges investors to be patient. It's unlikely that precious metals will please their fans before the second quarter. In the first quarter, the U.S. economy will retain its strength, and the Fed will drag its feet on lowering the federal funds rate. Overall, the company predicts an average gold price of $2,019 per ounce in 2024.
Thus, XAU/USD has returned to its roots. Its dynamics once again depend on the monetary policy of the Federal Reserve. However, Fed Chairman Jerome Powell's hawkish rhetoric following the December FOMC meeting risks pushing quotes even lower.
Technically, it makes sense to play the inside bar, selling gold from $1,979 and $1,974 and buying it from $1,997 per ounce.
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