The fall of the US stock market during the recession caused a strong XAUUSD decline. Currently, it has contributed to the gold growth. Why does XAU react differently to similar events? Let’s discuss the topic and make up a trading plan.
Weekly gold fundamental analysis
COVID-19 and the associated recession have severely undermined investor confidence in gold as a safe-haven asset and inflation hedge. As the pandemic slowly ends, the precious metal soared to record highs during the slowdown in consumer prices. However, gold collapsed when inflation accelerated to the highest levels in several decades. Only the beginning of the war in Ukraine gave strength to the XAUUSD bulls, but then investors preferred the US dollar as a safe haven. Only at the end of May that gold began to recover.
It is generally accepted that XAU value is affected by the Forex and securities market conditions. Since gold is quoted in dollars, the USD rally to 20-year highs is a headwind for it. So is the rise in US Treasury yields. During such periods, non-interest-bearing gold declines. The correlation between XAUUSD and stock indices is more complex.
Historically, demand for gold as a safe haven has risen in times of worsening global risk appetite and has fallen when investor optimism has increased. However, during the 2020 recession, gold declined heavily along with the S&P 500. The main reason was the desire of stockholders to support unprofitable trades. This required increased liquidity, and it was done by selling other assets, including gold.
Alas, the US stock market conditions then and now are polar opposites. For several decades, investors have followed a buy-on-decline strategy that has allowed them to earn an average of 17% per year on the S&P 500 over the past five years. They believed that at a critical moment, the Fed would help. This was the case in 2018 when the stock market collapsed, the Fed suspended the monetary restriction cycle, and in 2011, when the central bank launched Twist in response to the downgrade of the US rating. Even in 1998, the regulator lowered rates due to the Russian default.
The scale of those S&P 500 declines is comparable to the current one, but now the Fed is on the alert! It is focused on tightening financial conditions and does not react to events in the stock market.
Dynamics of US financial conditions
According to Kansas City Fed President Esther George, the stock market crash was not a surprise, as Jerome Powell has repeatedly announced rate hikes. Simply put, the central bank was not afraid of the S&P 500 fall. The Fed will not retreat from its strategy, which means that investors should switch to selling stocks on growth. This is good news for gold as it recovers its safe-haven status. However, falling Treasury yields and the US dollar are required to continue the XAUUSD rally.
Weekly gold trading plan
In my opinion, the market has relied too much on the recession. Strong data on orders for durable goods, PMI, and PCE Price Index will return investors’ interest in the US dollar and become the basis for gold sales, as well as the inability of XAU to consolidate at the levels of $1860 and $1845 per ounce.
Price chart of XAUUSD in real time mode
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