Has gold remembered its primary function of hedging inflationary risks? Or is it just tired of falling? Whatever it was, the precious metal, unexpectedly for many experts and investors, ignored both the strengthening of the dollar and the rise in US Treasury bond yields in response to the surprise from US consumer prices, which accelerated in June from 5% to 5.4% YoY.

Gold is traded in US dollars, it is usually perceived as an anti-dollar, therefore, an increase in the USD index, as a rule, leads to a decrease in prices for precious metal futures and vice versa. At the same time, the analyzed asset is not able to compete with interest-bearing bonds, therefore, an increase in rates on them is a "bearish" factor for XAU/USD. At the auction on July 13, these ties were broken. The dollar and US debt yields rallied, but gold seemed to ignore it.

Dynamics of gold and US Treasury bond yields

In fact, the ideal environment for precious metals are periods of abnormally low or abnormally high inflation, accompanied by slow GDP growth, that is, the so-called stagflation. In the first case, the Fed will continue to adhere to ultra-soft monetary policy as long as possible. In the second, it will puzzle over whether it is necessary to knock down the arrogance of inflation while slowing down economic growth by raising rates, or not. That is why the XAU/USD bulls managed to find their ground after the June sales. Let me remind you that the first month of summer was the worst for gold in the last 4.5 years.

Indeed, labor market problems and a slowdown in business activity are forcing investors to wonder: Will the actual GDP recovery be as robust as expected? At the same time, the US economy is facing the fastest acceleration in core inflation since 1991. As a result, opinions within the FOMC are divided. Some think that the employment indicators have not yet been met so that QE can be rolled out; some, on the other hand, are calling for a quick end to the $120 billion a month quantitative easing program. They say that it is inflating a bubble in the real estate market, and it is time to take inflation by hand.

In my opinion, the US labor market will recover faster in the fall than in the summer due to the expiration of the validity of incentive checks. This will restore investor confidence in the strength of the American economy and push the Fed to take decisive action. The dollar will strengthen on expectations of monetary policy normalization, while gold will go down. However, the split in the ranks of the FOMC does not exclude the possibility of its short-term strengthening. Especially if Jerome Powell remains committed to the dovish position in his speech to Congress.

Technically, after reaching the target of 61.8% according to the Gartley pattern, a regular correction to the downward trend for the precious metal started. In such conditions, the growth of quotes to $1,830 with their subsequent return downward and closing below $1,815 per ounce should be used for sales. The same is true for a rally to $1,845 and then a return to $1,830.

Gold, Daily chart