The Danger of the "Gold Rush"

XAU/USD

Key zone: 3,600.00 - 3,680.00

Buy: 3,700.00 (on strong positive fundamentals); target 3,850-3,950; StopLoss 3,620.00

Sell: 3,600.00 (on a pullback after a breakdown of 3,650); target 3,450.00; StopLoss 3,680.00

Gold is steadily updating its highs, approaching the $3700 zone. The nearly 40% growth since the beginning of the year outpaces the bullish dynamics of the COVID-19 pandemic and the 2007–2009 recession. The main reason is the multifactor risk of constant and unpredictable policy shifts.

Today, everyone is caught up in the "gold fever": from jewelry buyers at Costco and owners of underground vaults in London to traders of all scales. Investors are seeking shelter from uncertainty in gold.

Expectations of a Fed rate cut continue to crush the US dollar and fuel the growth of a non-yielding asset. Rising prices are mainly provoked by actions of the White House and the looming threat over the US economy and its global role.

• Trade wars have accelerated inflation and made economic forecasts unpredictable.
• White House pressure on the Fed threatens the independence of the global financial regulator.
• The dollar posted its weakest first half in 50 years.
• No progress in resolving military conflicts.

The price rally began nearly three years ago when central banks and Chinese investors started actively buying gold. This year, they were joined by Western investors who massively invested in exchange-traded funds (ETFs) backed by physical gold. Since January, net assets in such US-based funds have risen by 43%.

A new impulse came from expectations of Fed rate cuts: lower rates make non-yielding assets more attractive compared to government bonds. By early September, hedge funds allocated 47% of their net commodity assets to gold.

Confidence in US economic growth and dollar strength could stop the rally. But so far, only the stock market is hitting records, while equity investors hedge risks with non-dollar-denominated assets — gold being the most logical choice.

Extreme overbought conditions, falling US Treasury yields, and weak dollar demand are pushing gold higher at the start of the new week as markets prepare for central banks’ monetary policy announcements. Spot gold is trading near new historical highs slightly above $3680. In the near term, XAU/USD looks ready to continue its upward move, despite strong resistance above $3700.

So we act wisely and avoid unnecessary risks.

Profits to y’all!