The myth that gold is a hedge against inflation has long been dispelled. On the contrary, history has shown numerous examples where XAU/USD quotes fell in response to accelerating consumer prices or, conversely, rose if the CPI growth rate was decreasing. The latest example was the expectation of a slowdown in the rate of consumer price growth in the U.S. from 4% to 3.1% in June. Thanks to this, the precious metal managed to find a bottom near the $1,900 per ounce mark and went on the counterattack.

As inflation returns to the 2% target, the market is increasingly convinced that the Fed is wrong. The central bank predicts two acts of monetary restriction by the end of 2023, but, in reality, there will be one. Why go too far and push the economy into a recession if you can ensure a soft landing? The end of the monetary policy tightening cycle puts pressure on the U.S. dollar and strengthens the positions of assets denominated in it. Gold is no exception.

U.S. Inflation Dynamics

Furthermore, the rally in XAU/USD finds support in the physical asset market. Concerned about the freezing of Russian reserves, central banks have significantly increased their purchases of the precious metal, driving global demand to 11-year highs. However, while regulators were ready to acquire gold through ETFs or swaps in 2022, they now prefer bullion in 2023.

Additionally, there has been a sharp increase in demand for storing the precious metal within countries. According to an Invesco survey, 68% of central banks are doing so, compared to 50% in 2020. This figure is expected to rise to 74% within five years.

It is time for investors to understand that gold reacts not to inflation but to monetary policy, which, in turn, aims to regulate inflation. Therefore, the slowdown in consumer prices in the U.S. is seen as a precursor to the imminent end of the Fed's monetary tightening cycle and provides support for XAU/USD. Conversely, if it turns out that CPI grew faster than expected in June, the precious metal risks returning to the $1,900 per ounce mark.

The assumption that the federal funds rate will peak at 5.5% in July and then remain at that level for a long time deals a blow to the dollar and U.S. Treasury bond yields. As a result, a favorable environment for gold emerges. Some market participants believe that even if the cost of borrowing reaches 5.75% and goes higher, the U.S. economy will fall into a recession. Downturns, typically, are good news for XAU/USD.

Such a macro environment suggests a limited potential for the peak of precious metal quotes. At the same time, the completion of the Federal Reserve's monetary tightening cycle or a recession in the U.S. economy will provide tailwinds for XAU/USD.

Technically, on the daily chart, two reversal patterns are being implemented: the red Wolfe Wave and the blue 1-2-3. At the same time, breaking through the resistance at $1,943 and $1,950 will be a catalyst for the precious metal's rally towards $1,990 per ounce. On the contrary, gold's inability to hold above the $1,932 support is a reason to sell.