20.05.202013:16 Forex Analysis & Reviews: Gold dynamics

History repeats itself. The global recession, large-scale fiscal, and monetary incentives allow us to draw parallels with the events of 2008-2011. Then, inspired by the weakness of major world currencies and the low yield of bonds, gold managed to soar above $ 1900 per ounce. Investors relied on accelerated inflation, a hedging instrument against which the precious metal has traditionally been opposed. I must say that in the end, the XAU / USD bulls made a mistake: inflation remained depressed, and profit-taking on longs led to a breakdown of the upward trend. However, there are differences between those events and the current situation.

The size of fiscal and monetary incentives in response to a pandemic is significantly larger than in 2008-2011. The Fed's balance sheet is growing by leaps and bounds and is expected to exceed $ 11 trillion by the end of 2021, according to experts at the Wall Street Journal. Democrats in the House of Representatives insist on expanding economic support measures by another $ 3 trillion. There are no doubts that the budget deficit and US public debt will increase rapidly. To ensure that debt management is not very painful and does not create serious obstacles to the recovery of the US economy, the Treasury needs two things: keeping bond rates at a low level, and inflation. I believe that the authorities will strongly support the idea of accelerating consumer prices. And not only in the States.

Fed balance sheet dynamics

In 2009-2011, not only demand was restored after the crisis, but also supply, which slowed CPI, coupled with a slowdown in the velocity of money circulation. In 2020-2021 there may be problems with the proposal. Many companies are on the verge of bankruptcy because of quarantine, many are forced to revise their supply chains, all the more so as the US-China trade war has contributed to slowing international trade. Demand in the presence of a vaccine, on the contrary, will recover quite quickly, which increases the risks of accelerating inflation.

The vaccine from COVID-19 on the long-term investment horizon is able to play on the side of gold, but in the short term, rumors about its creation have formed obstacles to the XAU / USD bulls. Indeed, the sooner this happens, the faster economies open, the less demand for safe haven assets. On the other hand, the US dollar is currently the main safe haven asset, and its weakness creates a fair wind for buyers of precious metals. The latter successfully maneuvers between the weakening greenback and the growing S&P 500, which allows ETF fans to buy their products at a record pace. So, in April, the inflow of capital into gold-oriented specialized exchange funds reached a historic high of $ 9.2 billion. In March, it was $ 7.7 billion.

In general, the favorable situation for precious metals has not changed, which allows you to keep the longs formed at the breakout level of $ 1720 per ounce and average positions if gold returns to the triangle. The target is the level of 161.8% according to the daughter pattern AB = CD, located near the $ 1800 mark.

Gold daily chart