The dust from the shocks related to the banking crisis is gradually dissipating, credit institutions in the U.S. are pleasing with positive corporate reporting, and investors are increasingly asking themselves whether gold has climbed too high. If the cracks in the American economy are not as significant as expected, and a downturn can be avoided, why accumulate safe-haven assets?
There are currently two completely opposite opinions on the market. One group of investors, led by TD Securities, believes current derivatives forecasts of a 150 bps cut in the federal funds rate from its peak to the end of 2024 are understated. In fact, the Fed will loosen monetary policy even more, making a dovish turn in 2023. All this will occur amid a recession and a PCE slowdown to 2%, as evidenced by the reduction in annual inflation expectations from the Cleveland Fed to 2.1%.
Another group of investors, led by Goldman Sachs, takes a different view. They believe that the Fed will not be able to bring inflation down to the 2% target either this year or next. The central bank will prefer to fight high prices even against the backdrop of a recession. It won't want to repeat past mistakes. In the 1970s, its predecessors prematurely halted the monetary tightening cycle, which triggered a new surge in inflation, a resumption of rising borrowing costs, and a deep recession.
Diametrically opposed views lead to different speculative rates. If hedge funds have built up shorts on futures for 10-year U.S. Treasury bonds to a maximum since July 2019, then asset managers, on the contrary, are buying them like hotcakes.
Dynamics of speculative positions in U.S. bond futures
Such positioning increases the risks of sharp fluctuations in the debt market, to the dynamics of the yield of which gold is highly sensitive. At the same time, there is an opinion in the market that the growing volatility of bonds is due to the U.S. dollar, not vice versa. Allegedly, investors have come to terms with the idea that the Fed will raise the federal funds rate by 25 bps to 5.25% in May and are playing options to keep it at its peak or cut it in 2023.
Thus, the tug of war between supporters of the "dovish" reversal idea and its opponents leads to consolidation of the precious metal. Its future fate still depends on the conjuncture of the debt and currency markets, and the statements of St. Louis Fed President James Bullard that investors are wrong about recession and that the Fed should keep raising rates, contribute to strengthening of the U.S. dollar and a decline in XAUUSD quotes.
Technically, the Anti-Turtles pattern is about to activate on the daily chart of gold. Later there is a risk of its transformation into the Shark, followed by the fall of prices below $1900 per ounce. For the realization of such a scenario a successful test of the fair value at $1980 is necessary. It will also become a basis for short-term sales.