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The bipolar world and the diversification of gold reserves by central banks have broken the precious metal’s ties to the US dollar and Treasury yields. Let’s discuss it and make a trading plan for XAUUSD.
Weekly fundamental forecast for gold
The more we create something, the lower its price. For decades, gold has fallen when Treasury yields have risen and the US dollar has strengthened. But everything has its limits. Washington prints as much money as it needs and borrows without thinking of the consequences, and China becomes dissatisfied with such an approach. The world becomes bipolar, and the entire system that existed before collapses. It was its collapse that allowed XAUUSD to reach new all-time highs.
Until 2022, the gold market was predictable. As the precious metal flowed from West to East, some expected a downtrend. Asia was buying gold at low prices, while North America was getting rid of it, draining ETF reserves. Both the precious metal and US Treasuries were considered safe havens, and the growing demand for Treasuries led to a decline in their yields, while XAUUSD prices rose. This is no longer the case! Since the military conflict in Ukraine has begun, everything has turned upside down. Real US bond yields are moving against gold in a way that has not been seen for decades.
Gold price and 5-year Treasury real yield
Source: Bloomberg.
Everyone says that central bank buying and China’s insatiable demand are the reasons for gold’s rapid rally. However, China imported 30%, or 130 tons, less gold in April, and gold soared to a new record high in May. As you can see, there is no correlation. Central bank buying is important but only part of asset diversification.
Central banks’ gold purchases
Source: Wall Street Journal.
The PBoC increased the share of gold in reserves from 2% to 5% in 2015-2024. Over the same period, the holdings of Treasuries fell from 44% to 30%. It’s one thing for Treasury yields to rise on expectations that the Fed will tighten or keep rates on hold; it’s another when a major player in a bipolar world gets rid of them. According to IMF research, central banks diversify reserves mainly to protect against economic uncertainty and geopolitical risks, including sanctions.
The US dollar and Treasuries have indeed become overabundant in the global financial system. Their value has declined, and gold has replaced them.
Weekly trading plan for gold
However, it is important to note that China and other Eastern countries are not the only players in the precious metal markets. Some Western countries still believe in the XAUUSD’s link to the Fed’s monetary policy, Treasury yields, and the US dollar. Therefore, rumors that the federal funds rate may remain at 5.5% in 2024 have caused gold to pull back. Now, investors can buy it cheaper on a rebound from supports of $2,315, $2,300, and $2,250 per ounce.
Price chart of XAUUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
