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Gold rose to unprecedented heights too quickly to stay there for long. When and why will the correction begin? Perhaps the reason will be the updated Fed forecasts? Let’s discuss it and make a trading plan for XAUUSD.
Weekly fundamental forecast for gold
Just a week ago, investors wondered why gold was growing so fast. Now, they are worried about how low it can fall. Usually, such a sharp rise is accompanied by some kind of catalyst, which was absent in March. All the trump cards of XAUUSD remain in the game, but they are well-known and have already been priced in the quotes. The most reasonable explanation is algorithmic trading, but if it really took place, the correction could be very rapid.
Geopolitics, strong demand from central banks, increased activity from Asian consumers led by China and belief in a federal funds rate cut supported gold. These factors allowed the precious metal to ignore the ninth month of capital outflows from ETFs. Since the beginning of 2024, their reserves have decreased by $5.7 billion.
Dynamics of gold ETF holdings
Source: Bloomberg.
The flight of capital from specialized ETFs does not allow gold to be put on the same level as Bitcoin. Spot ETFs with cryptocurrencies as the underlying asset raised about $11.2 billion on a net basis over two months, helping BTCUSD soar to all-time highs. Interestingly, both gold and Bitcoin set records at the same time.
However, both XAUUSD and risk assets led by US stock indices have long ignored the changing market views on the federal funds rate. This could not continue indefinitely.
Dynamics of the S&P 500 and market expectations for the Fed rate
Source: Bloomberg.
At the end of last year, CME derivatives were counting on six acts of monetary expansion by the Fed in 2024, but by the end of winter, these expectations had dropped to three. Investors came to a consensus with the central bank, which strengthened the US dollar against major world currencies and increased Treasury yields. Against such an unfavorable background, gold, as a rule, falls. But this time, it has soared!
XAUUSD bulls have algorithmic trading to thank. Gold has tried to break out $2,050 per ounce three times in its history, and each time it failed to stay there for long. The fourth time was successful, so the number of buyers quickly increased. Alas, by mid-March the situation resembles a bubble, and no matter how much Goldman Sachs officials talk about $2,500 per ounce, such a price looks like nothing more than a fantasy.
Weekly trading plan for gold
Only maintaining the December FOMC forecasts of three acts of monetary expansion in 2024 will allow gold to maintain its current position. If the Fed changes its mind and shows a desire to cut the Fed funds rate to only 5%, an XAUUSD sell-off will begin. The catalyst for gold’s downward movement will be its inability to stay above $2,155 per ounce. In this scenario, take profits on long trades entered at $2000 and switch to short trades.
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.
