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Gold will never match oil. Forecast as of 01.07.2022

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The size of the physical gold market is significantly smaller than the paper one. The scale of futures’ operations is greater than the demand and supply of a physical asset. As a result, other factors influence the XAUUSD price. Let us discuss the Forex outlook and make up a trading plan.

Monthly gold fundamental forecast

If the gold price depended on the supply and demand for a physical asset, its popularity would increase significantly. Indeed, the G7’s ban on Russian gold imports, steady investor interest, and a recovery in demand for jewelry as lockdowns are lifted in China predict a bullish XAUUSD trend. It is worth noting that Russia is the second biggest XAU miner, while China is the first consumer. Alas, the gold and oil markets are fundamentally different from each other. The precious metal market is run by speculators, which predetermines the price fall.

Structure of gold mining

Source: Bloomberg.

During the first half of June, the gold rate changed paradoxically. It was stable despite the rally in Treasury bond and US dollar yields. Such an environment is considered unfavorable for XAUUSD bulls. Gold does not earn interest and is quoted in US currency, so it cannot compete with Treasuries or the greenback when debt rates rise.

In my view, XAU stability is linked to concerns about the entry of the global economy into the era of stagflation, a combination of high inflation and sluggish GDP growth. As a result, stocks of gold ETFs did not fall as much as other metals in the sector. Silver, platinum, and palladium are significantly more dependent on industrial demand, which is extremely vulnerable in the face of an approaching recession. No wonder the XAUXAG rate reached the highest level in two years.

Dynamics of ETF holdings

Source: Bloomberg.

In my opinion, the stagflationary environment led to an overflow of capital from stocks and bonds to the US dollar and gold. Now investors are more concerned about the recession, not only the US one but also the global economy. As a result, money has flowed into treasuries and other safe-haven assets, including the greenback, the Japanese yen, and the Swiss franc. Their outflow from the precious metal market may increase if the S&P 500 stabilizes.

The first half of 2022 was the worst for the US stock market since 1970. The broad stock index lost more than 20%, with 72% of investors surveyed by Deutsche Bank expecting it to fall further, while 90% predict a recession in the US economy until the end of 2023. However, in January-June, the S&P 500 fell by 15% or more; in July-December, the index recovered and grew by an average of 24%. This was the case in 1932, 1939, 1940, 1962, and 1970. Asset managers currently have above-average cash positions, below-average equity positions, and a high level of pessimism about the outlook for the economy. These factors could trigger a rally in stock indices and an outflow of capital from the gold market to the equity market.

Gold trading plan for a month

The slowdown in US inflation, inflation expectations, and the associated growth in the real yield of US Treasury bonds create another headwind for the XAUUSD. It is unlikely that the Fed will change its stance before it receives some evidence of a PCE slowdown. This gives reason to continue selling gold towards $1750 and $1720 per ounce.

Price chart of XAUUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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