Gold Seized the Dollar

Gold managed to get away from a four-month low due to the weakness of the US dollar and the fall in the yield on Treasury bonds. UBS notes that the collapse of prices at $90 from the level of its June highs is not surprising, as real treasury rates of the US and the eurozone debt market rose to annual and more than annual highs. Nevertheless, the bank expects a stabilization of the yield of securities at current levels, which will allow precious metals to reach $1,200 per ounce and form a medium-term range of consolidation.

Gold is not in a position to compete with revenue-producing bonds, so the wave of sales in the market of the latter, which is fueled by the "hawkish" rhetoric of several central banks of developed countries, has become the catalyst for the collapse of XAU/USD prices. The shares of negative yield bonds included in the Bloomberg-Barclays index dropped to 14%, its lowest value for the last 18 months. In terms of value, we are talking about $6.5 trillion. In mid-2016, when a referendum showed the desire of the U.K. to withdraw from the EU, there were more than $12 trillion. The smaller the securities with zero or negative interest rates are, the more difficult it is for the precious metal. Commerzbank reports an outflow of capital from the ETF with the amount equivalent to 22.6 tonnes in the week ended July 7. Holdings at the largest specialized fund SPDR Gold Shares have reached the lowest level since March.

The situation in the futures market is not any better. Hedge funds are well aware of the threat posed by the monetary policy of central banks of developed countries, and reduced their net-long futures and options by 51% to 37,776 contracts, which is the worst fall since 2015.

The dynamics of speculative net positions on gold

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Source: Bloomberg.

However, the collapse in prices, as a rule, would attract buyers of the physical asset. According to Bloomberg sources, who wished to remain anonymous, gold imports by India jumped to 72 metric tonnes in June from 31.8 tonnes a year earlier. In May, there were even more than that (126 tonnes). In fact, the main reason is not the peak of gold in the world market, but rumors of a raise in tariffs by 5%, which fueled increased appetite from jewelers to build up inventories and purchases due to the wedding season in August-September. As a result, the tax was raised by 3%, in fear that the slowdown in imports in July will raise risks.

In the short term, Janet Yellen's speech before the Congress will be important in order to clarify the fate of XAU/USD. There are rumors in the market which claim that Donald Trump is planning to replace her with Gary Cohen, so that speech could be her last. Nevertheless, investors continue to follow the Fed Chairwoman's words with aspirations. If it remains optimistic on the outlook for the economy and inflation in the US, the dollar could quickly recover lost ground, sending gold to another knockdown.

Technically, if the re-test support at $1208 per ounce succeeds, then the "bears" will be able to develop a downward trend in the direction of $1180, $1160 and $1140.

Gold daily chart

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