Gold has put the dollar in check

If for most of the year it is neither shaky nor so-so and by the end of it you cannot get out of the red zone, competitors always have a chance to get around you. For the first time since 2002, palladium prices have exceeded the value of gold. In the market they talk about the topic of who is now the most precious metal, although it would be too loud to call palladium precious. Most of the demand for it comes from the automotive industry, where high requirements for carbon dioxide emissions and import duties have inflated interest in the asset to unprecedented heights. Gold is still looking into the mouth of the American dollar.

Dynamics of gold and palladium


The growing risks of a slowdown in the US economy, Jerome Powell's "dovish" rhetoric and a truce in the China-US trade war allowed the XAU/USD bulls to attack. The pair at arm's length approached the October high, a breakthrough of which would allow us to talk about reaching the semi-annual peak. The rally could have gone faster if it had not been for the expectations of strong statistics on the US labor market for November and the belief of investors in raising the Federal funds rate at the FOMC meeting on December 19. However, as history shows, the tightening of monetary policy is not necessarily a "bearish" factor for gold.

Thus, in the period from 2004 to 2006, when the Fed used monetary tightening and brought borrowing costs to 5.25%, the precious metal grew by 50%. Since the beginning of the current normalization cycle (2015-2018), its cost has increased by 15%, although from January this year, on the contrary, fell by about 5%. The reason should be sought in the conjuncture of the currency and stock markets. The end of the rate-hike cycle does not support the US dollar and forces stocks to fall on fears of the upcoming recession. Something similar is happening now: the fall in the yield curve of Treasury bonds to the lowest level in the last 11 years indicates the proximity of the recession. It usually occurs 12-18 months after the inversion.

Dynamics of gold and the Federal funds rate


The behavior of central banks, competitors of the Fed, is important. If, for example, the central bank tightens monetary policy, then the USD index risks going down, which is a "bullish" factor for XAU/USD. In 2018, the European Central Bank does not mumble, allowing the dollar to feel confident, despite the growing risk of a recession in the U.S. economy.

Let's not forget about the de-escalation of the trade conflict. The increase in import duties accelerates inflation and forces the Fed to act aggressively. In addition, the war has less impact on US GDP than on the global economy. Thus, the truce deprives the "greenback" of important trumps and contributes to the growth of prices for precious metals.

Technically, in order to continue the gold rally, the bulls need to update the October high and activate the AB=CD pattern. Its target is 200% at $1,290 per ounce.

Gold, daily chart


The material has been provided by InstaForex Company -