The excitement because of the end of the Fed’s tightening cycle pushed gold to its highest levels since April. However, the Fed may turn dovish in 2023, which encourages the buyers to exit long trades. Let’s talk about this topic and draw up a trading plan.
Weekly gold fundamental forecast
Investors are usually willing to draw historical parallels. The 6-week rally of gold, its best January since 2012 with an increase of more than 5%, reminded many of the summer of 2020. At that time, following nine weeks of continuous growth, the precious metal reached an all-time high at $2,069.4 per ounce. However, the conditions are radically different now. In 2020, the XAUUSD rally was associated with huge amounts of cheap liquidity provided by the Fed. Still, now, the US central bank is simply slowing down the pace of its monetary tightening and is ready to pause the process. Has the gold price climbed too high?
Of course, the gold’s rally to the previously indicated target of $1,940 per ounce is based on the USD index, which has lost about 10% of its value from the levels of September highs and the yield on Treasury inflation-protected securities, which has dropped from 1.75% to 1.2%. Gold is quoted in US currency, so the dollar drop supports the gold rally. Furthermore, the debt market rates are lower, making the costs of the service for storing gold also lower and allowing the capital to flow into the precious metal market.
It is not surprising that, against such a favorable background, speculators increased net longs in gold to the highest levels since April 2022. However, if the activity of hedge funds does not correspond to the indications of the physical asset market, the XAUUSD rally may not continue. Yes, last year’s ETF outflow has slowed down, but it’s still happening. So, for twenty days of January, despite the rise in prices, investors withdrew more than 5 tons from SPDR Gold Shares.
Dynamics of USD speculative positions
Source: Wall Street Journal.
TD Securities claim that the gold rally in the autumn and winter resulted from central banks’ active purchases of gold, which may end because of high prices. Therefore, speculators have a good reason to take the profits and exit longs.
In my opinion, the gold price surge was driven by hopes for a Fed’s dovish shift in 2023. It would hardly be expected if the US were not hit by a recession. However, strong employment and GDP data allowed investors to buy the idea of a soft landing in the financial markets. Stock indices rose, as did US Treasury yields. The rally in bond yields supported the US dollar and sent the gold price into a correction.
Dynamics of expectations for Fed’s rate
Source: Bloomberg.
The main risks for gold are suggested by maintaining the federal funds rate at the ceiling level of 5% amid the strength of the US economy.
Weekly XAUUSD trading plan
In this regard, the combination of the Fed’s hawkish tone following the February FOMC meeting and strong December employment data could send the XAUUSD down to $1907, $1887, and $1873. In the future, the deterioration of the US domestic data will be the reason for a price rebound and purchases of the precious metal.
Price chart of XAUUSD in real time mode
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