FX.co ★ Gold may return above $2000 mark amid inflation acceleration and falling dollar

The rapid growth in the yield of US Treasury bonds and the associated strengthening of the US dollar dealt a serious blow to gold, but after the end of the auction of the Department of Treasury, the precious metal began to recover. Its medium-term prospects look optimistic against the backdrop of a potential acceleration of inflation due to large-scale fiscal stimulus, which means that the bulls on XAU/USD should not lose heart and use the correction to buy a cheaper asset.

It would seem that the "blue wave" in the United States was supposed to be a joker for gold. At the end of 2020, it was actively growing on expectations that Democrats would gain control not only of the White House but also of the entire Congress. The reality was different. The trillions of dollars promised by Joe Biden have inflated the yield on US Treasury bonds due to the expectation of a large-scale issue of debt obligations. As a result, the attractiveness of US assets increased, and the USD index soared. Gold was in disgrace not only because of the dollar rising from the ashes, but also because of the rise in real bond rates.

Dynamics of gold and US dollar

Nevertheless, history shows that the increase in yields due to expectations of an increase in the supply of debt is most often temporary. Loans have been rising by leaps and bounds in recent years, but interest rates are near record lows. The fact that profitability went down after the $38 billion auction proves this. Yes, the demand was higher than its average values (bids were 2.47 times the size of the offer), yes, dealers got only 20% of the issue volume, but after the auction, gold was able to recover.

Gold may be drawn in bright colors in the near future. The real yield on US Treasury bonds remains quite negative, the dollar is likely to continue to decline, and Joe Biden's plan for additional support for the US economy, which the Democrat expects to present to the general public on January 14, will further increase inflation expectations. The precious metal is traditionally perceived as the best hedge against inflation, so Standard Chartered is seriously counting on its return above $2000 per ounce during the first quarter. UBS believes the XAU/USD sell-off has gone too far and expects to see prices rise.

The main risk for gold fans is the quick reaction of the Federal Reserve to the acceleration of the US economy than the markets currently assume. In December, CME derivatives signaled that the federal funds rate would not rise until 2024, but in early January, they expected it to rise by 50 basis points by the end of 2023. A number of FOMC officials talk about curtailing QE, which supports the US dollar and unnerves buyers of the precious metal.

Technically, the Wolfe Wave pattern with targets near $1990 and $2060 per ounce is still relevant on the daily gold chart. A confident breakout of the pivot level at $1860, as well as dynamic resistance levels in the form of moving averages, should be used to form long positions.

Gold, daily chart