U.S. Treasury bonds

Gold is traditionally seen by investors as a hedge against inflation. However, it is not inflation that drives the XAU/USD quotes, but recession. In the spring, the precious metal confidently rose towards historical highs amid expectations of an impending downturn in the U.S. economy. However, a stable labor market and positive macroeconomic indicators suggested a soft landing. This led to a collapse in the price of gold during the summer. As autumn approaches, the cooling economy is once again translating into its rise. Disappointing statistics from the U.S. are a reason to buy gold. The weaker the data, the less likely the Federal Reserve will implement its June forecast and raise the federal funds rate to 5.75%. Regardless of how much Fed Chairman Jerome Powell argues otherwise in Jackson Hole.   Furthermore, once a tightening monetary policy cycle ends, a dovish pivot usually follows. Monetary expansion creates a favorable environment for XAU/USD. Dynamics of the federal funds rate and gold     In this respect, the sharp decline in consumer confidence from the Conference Board in August and the continued peak in job vacancies and layoffs in the U.S. labor market in June are alarming signs for the U.S. economy and great news for gold enthusiasts. The chances of the Fed raising borrowing costs in 2023 have once again dropped below 50%, which adversely affected the dollar and allowed XAU/USD to counterattack. In essence, asset managers who reduced their net short positions on precious metals to their lowest levels since mid-March were mistaken. Aswere investors who withdrew money from ETFs for 13 weeks in a row. They were betting on the highest yield of U.S. Treasury bonds in over a decade. However, as soon as the U.S. macro data began to deteriorate, U.S. debt market rates declined, and XAU/USD quotes went up.   Dynamics of market expectations on the Federal Reserve rate   What's next? Gradual cooling of the labor market, a sharp reduction in excess savings, and mortgage rates rising above 7% paint a picture of new cracks in the U.S. economy. The tightening of the Fed's monetary policy occurs with a temporary lag. The more time that passes since the beginning of the cycle, the more painful the monetary restriction will be. Under such circumstances, recession risks will increase again.   In the end, the markets will return to the original conditions that existed in the spring and pushed gold to $2,075 per ounce. However, there is another scenario. The U.S. economy will continue to pleasantly surprise; the likelihood of forming a new inflation peak increases, as do the chances of raising the federal funds rate to 5.75%. Technically, on the daily chart of the precious metal, there is a "Double Bottom" pattern. Thanks to this, gold broke above the EMA and has the opportunity to continue its rally towards the fair value of $1,962 per ounce. As long as prices hold above $1,929, traders should focus on buying.    

What does the price of gold depend on? At first glance, the answer is simple—it depends on the cost of money. The lower central bank interest rates are, the cheaper they become. The more expensive the precious metal must be quoted. Conversely, in times of high interest rates, the XAU/USD pair should fall.   At the same time, gold is an anti-dollar. The dynamics of the USD index often determine where the precious metal will move. Unfortunately, in 2023, historical correlations were disrupted, and only the September meeting of the Federal Reserve returned everything to its usual state. Looking at how gold maintains stability in the face of rising real yields on U.S. Treasury bonds, investors involuntarily asked themselves why. Real yields are the cost of money. In a world of expensive money, precious metals should not feel comfortable. Dynamics of gold and real yields of U.S. Treasury bonds.     The same can be said for the dollar. It pleasantly surprised its fans, marking a 10-week winning streak amid the strength of the U.S. economy and the Federal Reserve's reluctance to allow a dovish pivot. Speculators en masse closed short positions on the U.S. currency, and the expectation of a government shutdown only fueled demand for it as a safe haven. Nevertheless, gold ignored the extremely unfavorable external background until the end of September, which allowed for bullish forecasts. After all, if an asset doesn't go where it is expected to, it's more likely to go in the opposite direction. According to Macquarie, the precious metal can rise to $2100 per ounce if U.S. Treasury bond yields and the U.S. dollar decline. If you receive good news in adverse conditions, XAU/USD is capable of marking a swift rally.   Dynamics of gold and the U.S. dollar   To the disappointment of gold enthusiasts, positive news is not coming in. Investors are gradually getting used to the idea that high interest rates are here to stay for a long time. The cost of money has sharply increased and will remain so for an extended period. The precious metal loses its shine and begins to do what it should—fall. In my opinion, the reasons for the stability of XAU/USD should be sought in China. Currently, premiums for bars in Shanghai exceed prices in London and New York by more than $100 per ounce. Gold in China costs more than $2000. The People's Bank of China started this process by avidly buying precious metals as part of the de-dollarization process. Then consumers picked up the baton. Due to the real estate market crisis, the weakening of the yuan, and strict capital controls, the population is buying gold.     Unfortunately, intermarket connections will sooner or later make themselves felt. The strengthening of the dollar and the rise in the real yields of U.S. Treasury bonds pushed XAU/USD below 1900. Technically, on the daily chart, gold has the formation of a Shark pattern at 5-0. The target level at 161.8%, according to the latest model, is $1825 per ounce. Breaking support at $1895 will allow for the formation of short positions.