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Gold resiliently weathered negative news for it about the agreement between Republicans and Democrats to raise the debt ceiling until 2025 and the approval of the bill by the House of Representatives with 314 votes in favor and 117 against. The precious metal could have become a true star of the financial markets in the event of a default. However, it didn't happen. We have to return to monetary policy. And here, good news has been found for XAU/USD.
According to Federal Reserve Governor Philip Jefferson, a pause in the process of raising the federal funds rate will provide an opportunity to gather more information and assess the need for further steps. Philadelphia Fed President Patrick Harker believes that every other FOMC meeting can be skipped. Take a pause, then raise rates, and then take another pause. Such comments reduced the chances of an interest rate hike in June from 60% to 30%. This weakened the U.S. dollar and allowed gold to counterattack.
Dynamics of market expectations for the Fed rate
In my opinion, the spring dynamics of the precious metal are driven by dominant narratives in the market. If investors were afraid of a recession in March and April, then in May, they were more concerned about inflation sustainability. This allowed discussions about the absence of a "dovish" Fed pivot in 2023 and the continuation of the monetary policy tightening cycle in June.
Fears of a recession subsided against the backdrop of banking crisis and default issues fading into the background. Nevertheless, the commodity market signals the persistence of elevated downside risks. The Bloomberg Commodity Index has fallen by 12% since the beginning of the year, while gold has risen by 8%. It leverages its safe-haven asset status in a pronounced stagflationary environment.
The return of recession themes in the U.S. economy in case of worsening macroeconomic indicators in the States will reignite investor interest in buying XAU/USD. In this regard, the release of data on U.S. employment is of particular importance. Only very strong figures will bring back expectations of a federal funds rate hike in June and strengthen the dollar. Under different circumstances, the precious metal is capable of jumping above $2,000 per ounce.
In the long-term perspective, the process of reserve diversification through gold purchases and selling the U.S. dollar will become an important driver of support for XAU/USD. Central banks displayed record activity in purchasing the precious metal in 2022. According to WGC data, although the volume of gold purchases in the first quarter decreased to 228.4 tons, the indicator remains at an elevated level compared to historical standards.
Dynamics of gold purchases by central banks
Some regulators continue to be active. For example, the Central Bank of Iraq, the second-largest producer in OPEC, increased its reserves by 2.5 tons to 132.73 tons by the end of May.
Technically, on the daily chart, gold's return to the range of fair value at $1,963–$2,056 per ounce and a successful test of dynamic resistances in the form of moving averages could be signals of the correction's completion. We will buy the precious metal on a breakthrough of the local high at $1,973.
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