29.03.202313:14 Forex Analysis & Reviews: Gold's strength will be tested

The lack of news is already good news for the stock market. Shocks from the bankruptcy of three U.S. banks, the Credit Suisse takeover, and the problems of First Republic and Deutsche Bank have investors scrambling for safe haven assets. This allowed gold to soar above $2,000 an ounce for the first time since the armed conflict in Ukraine began. However, as soon as the smoke began to clear, with no new signs of panic around the banking system in sight, speculators decided to get rid of longs on XAUUSD.

Usually, the increased interest of investors in the precious metal can be clearly seen in the markets for options, futures and ETFs. March will be the first time in 10 months that there has been an influx of capital into specialized exchange-traded funds. Open interest in the derivatives market is going through the roof, and the demand for call exceeds the demand for put by several times. As a result, the reversal risks for gold are directed upwards, which indicates a "bullish" market conjuncture.

Dynamics of options trading volumes

Investors are currently taking a wait-and-see attitude. They assume that the worst of the banking crisis is over, but they are in no hurry to buy risky assets, fearing the appearance of new skeletons from the closet. The precious metal is kept in portfolios just in case, which does not allow the "bears" on XAUUSD to develop a counterattack.

The pressure on gold is due to rising U.S. Treasury yields and declining chance that the federal funds rate will remain at 5% at the end of the FOMC meeting in May. Just a couple of days ago, CME derivatives gave an 83% chance of such an outcome, then the odds dropped to 62% and then to 55%. If U.S. inflation stays at elevated levels year-on-year and continues to gain 0.5%–0.6% month-on-month, the Fed will not pause. It will continue to tighten monetary policy, which is bad news for the XAUUSD.

In this regard, the release of data on the personal consumption expenditure index for February at the end of the week by March 31 is a kind of strength test for the precious metal. If it holds up, it will be possible to restore the upward trend; if not, the pullback will gain new momentum.

U.S. Treasury Reversal Risk Dynamics

Nevertheless, the medium- and long-term outlook for gold remains bullish. The end of the Fed's monetary restriction cycle is just around the corner, and during such periods, the U.S. dollar weakens, and Treasury bond yields fall, creating a tailwind for XAUUSD. Confirmation is the bullish reversal risks for U.S. debt. Traders are actively insuring against their growth, which is equivalent to a drop in profitability.

Technically, a 1-2-3 reversal pattern and an inside bar were formed on the gold daily chart. A successful test of the latter's low at $1,948 per ounce will increase the risks of a corrective movement and become the basis for short-term sales. In the future, we will catch the rebound from $1,919–$1,920 and $1,900 for a reversal.