17.06.202013:26 Forex Analysis & Reviews: Gold is hindered by inflation

Over the past two months, gold has been trading in the range of $1675 - $1740 per ounce, and going beyond it very quickly ends with a return. The precious metal remembers the history of the previous recession when large-scale fiscal and monetary stimulus generated the expectation of accelerated inflation and pushed its quotes above $ 1921, which was not in a hurry to grow and the Fed's exit from the quantitative easing programs reversed the upward trend in XAU / USD pair. The story repeats itself, but the differences between the current recession and the events of 2007-2009 make investors cautious.

There is currently no self-confidence regarding the take-off of CPI and PCE. On the contrary, according to Richard Clarida, vice chairman of the Federal Reserve, such a deep recession is likely to leave huge scars, and long-term inflationary expectations, which were at the lower end of the curve even before the crisis, could fall even lower. Economists fear a deflationary spiral, when, looking at a slowdown in consumer prices, people believe that in the future they will decline even more and are in no hurry to spend money. The bad news is for gold, which is traditionally perceived as a protective asset against inflation.

In fact, the precious metal is sensitive to the dynamics of real yield on US Treasury bonds. And while Jerome Powell and his team managed to bring down the rates of the debt market with gloomy forecasts, QE, and credit programs, then the risks of the deflationary spiral keep XAU / USD bulls from attacking. For the states with their issue of bonds of $ 3 trillion only in the second quarter, the low cost of servicing debts is extremely important, so the actions of the Fed look logical. American debt in 2020 will increase from 109% to 131% of GDP, the global figure will reach levels that occurred after the Second World War.

Global debt dynamics

The Federal Reserve aims to achieve low rates on bonds either by hook or by crook. Purchases of mortgage and treasury bonds worth $ 120 billion will not help, it is necessary to go to control over the yield, following the example of Japan and Australia. If inflation began to accelerate under such conditions, real rates would go down, and gold would probably surpass the $ 1800 per ounce mark. Alas, the prospects for consumer prices remain bleak, which forces the precious metal to adhere to the trading range of $ 1675-1740.

Many analysts claim that identifying the number of people infected in China for six consecutive days after a long break, as well as taking off the indicator to highs in six US states, supports gold as a safe haven. In fact, this function was staked out by the US dollar, and its strengthening promotes sales of precious metals.

In my opinion, there will be no deflationary spiral, a victory over COVID-19 is not far off, the economy will come to its senses, people will spend money, and CPI and PCE will grow. At the same time, the Fed's control over profitability will lower real bond rates and will allow buying gold on a rebound from supports at $ 1705 and $ 1675 per ounce. We are talking about the middle and lower border of the $ 1675-1740 trading range or the "shelf" of the "Splash and Shelf" pattern.

Gold daily chart