Gold never tires of baffling investors. It is falling despite the global recession, geopolitical tensions between the US and China, and riots in the United States over the murder of an African-American. In other words, it behaves like a risky asset. But the stock indices continue to rally! The S&P 500 reached a nearly 3-month high, and for a long time it was on the same road as the precious metal, but at the turn of spring and summer, the correlation broke down. Gold has found a new friend in the US dollar, and their paths usually diverge.

It is obvious that the reasons for the seemingly inappropriate behavior of XAU/USD should be found in the unusual conditions in which financial markets operate. Substantial monetary and fiscal stimulus, coupled with the belief that stock indices are recovering faster than the economy, allowed investors to buy stocks in April and May. And the higher the S&P 500 rose, the more self-confidence grew.

At the same time, the uncertainty surrounding the depth of the recession, the US-China trade conflict, and the speed and form of the US GDP recovery forced us to actively hedge price risks. Along with stocks, the dollar and gold found a place in investment portfolios. Now, when the economy opened, the theme of the second wave of COVID-19 has gone by the wayside, and the markets don't believe that Donald Trump in the presidential election will resume trade war with China, to keep safe-haven assets on hand in the same volume makes no sense. They are actively getting rid of them, which allows the "American" and the precious metal to move in the same direction. The opposite of the S&P 500.

Dynamics of the S&P 500, the dollar and gold

I do not think that the direct correlation of XAU/USD and the dollar will last indefinitely. The return of the market to normal conditions assumes that one of these assets will go up after some time, and the second - down. In my opinion, the US currency will continue to fall. In 2018-2019, the USD index strengthened due to the Fed's monetary restriction, the trade war, and the outperforming dynamics of the US economy over the global one. In 2020, the dollar was supported by increased demand for safe-haven assets. Now, this factor is played back, the resumption of the trade war is unlikely, and the reduction of the federal funds rate to 0.25% deprived the "American" of the main trump card.

Brown Brothers Harriman notes that since the end of February, the balance of the Federal Reserve has grown by 70%, the ECB – by 18%, the Bank of Japan – by 8%. The Fed is easing monetary policy more aggressively than competitors, which is a "bearish" factor for the USD index. In my opinion, the world economy, led by China, will grow faster than the US, which is another reason for selling the dollar and buying XAU/USD. It makes sense for traders to form long positions on the precious metal on the rebound from supports at $ 1700 and $ 1665-1675 per ounce.

Technically, the "bears" in gold expect to implement a 1-2-3 reversal pattern, but for a full correction, you first need to overcome the dynamic support in the form of moving averages and then take the important pivot levels at $ 1680 and $ 1665 by storm.

Gold, the daily chart