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Gold kicks back

When Goldman Sachs predicts that the Fed will raise the federal funds rate by 50 basis points at the May and June meetings, and FOMC members, including Chairman Jerome Powell, use pronounced hawkish rhetoric, gold is having a hard time. The precious metal failed to return above $1950 per ounce, which indicates the weakness of the bulls. However, buyers do not intend to just throw a white flag.

The statement of the head of the Fed that nothing will stop the Central Bank from either raising rates by 50 basis points, or from quickly reaching a neutral level, was a serious blow to gold fans. The derivatives market increased the chances of rising borrowing costs from 0.5% to 1% in May to 72%. At the same time, St. Louis Fed President James Bullard argues that in order to regain control over inflation and market confidence, the Fed needs to bring the rate to 3% by the end of 2022. Cleveland Fed President Loretta Mester is ready to quickly raise it to a neutral level of 2.5% followed by a slowdown in the monetary restriction cycle.

Derivatives market readings and hawkish rhetoric from FOMC officials are driving U.S. Treasury yields to rally to their highest levels since 2019, which is bad news for XAUUSD bulls. Real debt rates are the opportunity cost of holding gold—the higher it is, the worse it is for the latter.

Dynamics of gold and real rates on U.S. bonds


The Fed was obviously late in making a decision to start the process of tightening monetary policy and is now trying to catch up. The same goes for the other regulators, who usually follow the leader of the pack. According to 73% of the 886 global investors participating in the MLIV survey, all or most of the central banks of the developed countries of the world have not done enough to suppress inflation. Expectations of their aggressive monetary restriction caused the global index of government and corporate debt from Bloomberg to fall by 11% from the highs that took place at the beginning of 2021. Even during the crisis of 2008, the peak was not so serious.

Also striking is the huge bias in the options market, where put is sold at a higher premium than call. Without going into details, it can be stated that investors pay a lot of money to maintain long positions in gold.

Gold Reversal Risk Dynamics


Despite the unfavorable background from the point of view of monetary policy, the precious metal does not look like a whipping boy. First of all, we should pay attention to the inflow of capital into gold-oriented ETFs, which will amount to 117 tons since the beginning of the armed conflict in Ukraine. Events in Eastern Europe raise commodity prices, contributing to inflation acceleration, and at the same time support high demand for safe-haven assets.

Technically, the rebound from resistance at $1950 per ounce allowed us to form short positions. At the same time, the inability of the "bulls" to return gold quotes above the trend line of the Splash Stage of the "Splash and Acceleration Reversal" pattern indicates the weakness of buyers. In such conditions, the fall of the precious metal below $1910 is a reason to build up shorts.

Gold, Daily chart


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