Gold is also money. Once it served as a means of payment, now it is most often used as a store of value. However, the essence of the precious metal remains the same. It is a kind of currency, an anti-dollar, which reacts much more to the Fed's monetary policy than to the dynamics of supply and demand of the physical asset. That is why the readiness of the U.S. central bank to continue the cycle of tightening monetary policy affects XAUUSD quotes much more than Turkey's record Swiss gold imports since 2012 against the backdrop of a rise in inflation to 85%.
The exchange rate of the precious metal and the U.S. dollar are based on the same factors: the Fed and the debt market rates, which are interrelated. Investors assume what the maximum federal funds rate should be in the current cycle. If the actual cost of borrowing approaches it, the markets assume that the Fed has done its job well. They can afford to sit on the sidelines or even dovishly reverse, which weakens the USD index and encourages the XAUUSD. That was the case in November and January.
In February, the expected peak of the federal funds rate began to move away from its actual value. As a result, there was potential for rising borrowing costs, the yield on 10-year Treasury bonds at arm's length approached the 4% mark, which was rewritten last year for the first time since 2008, and the U.S. dollar strengthened. Gold had to give up the idea of soaring above $2,000 an ounce. Its house of cards was destroyed, and under the rubble were many bulls. They recall with horror the events of April 2021, when the chart's crossover with the 50-day moving average turned into a new wave of sales. A similar situation is taking place now.
Dynamics of gold and the 50-day moving average
Gold is a defensive asset. It feels good in a weak economy, the expectations of support from the Fed and other central banks in the form of cheap liquidity contribute to the growth of XAUUSD quotes. Recent reports have shown that the U.S. economy is strong. And the question now on the minds of investors is, will sustained GDP growth really mean sustained high inflation? If so, the federal funds rate will rise above 5.5%, the belief that leads to a stronger dollar and keeps gold in the black.
What's next? Much will depend on statistics on the U.S. labor market and inflation for February, which will be released in the first half of March. Then there will be a meeting of the Fed with updated forecasts. If the data starts to deteriorate, the market will perceive the strong January statistics as noise, and the USD index will go down. The precious metal will return to its former glory.
Technically, the downward movement of gold towards the $1,807 pivot level and the $1,775–1,782 convergence zone per ounce is gaining momentum. Selling with such targets remains relevant, but the rebound will be a signal for a reversal.