28.12.201707:17 Forex Analysis & Reviews: Gold got rid of the ballast

In order to soar to the sky, you need to drop the ballast. While most forex currencies behave quietly and peacefully at the end of the year, XAU/USD quotes jumped to a monthly high with a quick pace that gold previously showed back in August. However, by the end of the week on December 19, speculative net positions on precious metals moved confidently towards the area of the annual low. Extra passengers left the train, and it confidently went upwards.

Dynamics of speculative positions on gold

Source: Bloomberg.

Expectations of Congress's approval of the tax reform and its signing ahead of Christmas by the US president forced hedge funds to pull out of long positions on gold. It cannot compete with treasury bonds and is sensitive to the dynamics of the dollar, therefore, the repair of the fiscal system was naturally perceived as a "bearish" factor for the XAU/USD. Indeed, the acceleration of GDP and inflation should compel the Fed to aggressively hike the rate on federal funds, which will result in an increase in the yield of US bonds and in the strengthening of the "greenback." At the same time, a reduction in tax revenues of the budget and an increase in its deficit will lead to a growth in the volume of borrowing. JP Morgan believes that in 2018, the United States will sell securities worth $1.3 trillion at auctions, which is the highest for the past 8 years. Investors will get rid of bonds in the secondary market with an outlook to acquire them in the primary at higher rates. This will lead to an increase in profitability and a drop in prices for precious metals.

Nevertheless, at the end of December something went wrong. One can, of course, refer to the growing geopolitical risks surrounding North Korea, which considered the new UN sanctions an act of declaring war, but the market has already developed immunity to this factor. This is clearly seen from the market's reaction towards the latest test of Pyongyang's missiles.

I believe that the main driver of the growth of XAU/USD quotes was the disappointment of market participants regarding the reluctance of the US dollar and the yield of treasury bonds to grow in response to positive news about the tax reform. While investors have doubts that the most massive repair of the fiscal system will lead to an aggressive monetary restriction of the Fed, the US currency will not be able to regain its former trust. At the same time, according to Nomura research, the largest growth of US GDP under the influence of the tax reform will appear in 2018 (additional +0.7 pp), and in 2019 the effect will decrease to +0.2 percentage points. Given the current FOMC forecasts (+2.5%), the US economy can accelerate to a stable 3% or higher, which is a negative factor for gold.

Another thing is that the normalization of monetary policy by the FED's central bank peers makes US dollar positions vulnerable. At the same time, the Fed's commitment to a slow and gradual increase in the federal funds rate, as well as the growing risks of correction of the S&P 500, are able to support the "bulls" for XAU/USD.

Technically, the "Deception-Emission" pattern was implemented. As a result, the risks of activating the "Shark" pattern and the continuation of the rally in the direction of its target increased by 88.6%.

Gold, daily chart