The need for liquidity to meet margin requirements on equities and bonds is driving gold sell-offs. However, Fed inaction, a recession, and the end of conflicts could support a rally in gold prices. Let’s discuss it and make a trading plan for XAU/USD.
The article covers the following subjects:
Major Takeaways
- Falling real yields are positive for gold.
- Signs of a slowdown in the US economy will support XAU/USD.
- The precious metal may rise if peace is established in the Middle East.
- Short positions below $4,735 per ounce remain relevant.
Weekly Fundamental Forecast for Gold
Ironically, speeches by two staunch opponents, Jerome Powell and Donald Trump, helped XAU/USD recover after its worst monthly performance in March since 2008. However, the market quickly caught the White House leader in a false statement, which pushed the precious metal lower. It is now moving sideways, cautiously awaiting US employment data and developments in the Middle East.
Monthly Gold Performance
Source: Bloomberg
Jerome Powell rightly noted that monetary policy operates with a lag and cannot respond to crises in real time. The Fed needs to wait for second-round effects before raising rates. Central bank inaction amid rising inflation leads to a decline in real Treasury yields, which supports gold.
Moreover, gold may benefit in two additional scenarios. First, when investors start fearing a recession more than stagflation, prompting the Fed to move from holding rates to cutting them. Second, when geopolitical shocks fade. In this case, gold sell-offs driven by the need to meet margin requirements on equities and bonds begin to unwind, and XAU/USD rises. Investors began to price in this geopolitical scenario when Donald Trump stated that the Middle East conflict would last 2–3 weeks. However, his subsequent remarks about pushing Iran “back to the Stone Age” led to rising oil prices and a pullback in gold.
Gold and Oil Dynamics
Source: Bloomberg
Thus, there are three scenarios under which the precious metal may regain investor interest: the Fed keeps the federal funds rate unchanged while inflation rises, a recession emerges, or peace is established in the Middle East. Each of these scenarios takes time to materialize.
In essence, gold follows the same pattern. It declines during periods of turmoil, such as the COVID-19 pandemic, “Liberation Day” in the US, or armed conflicts in Ukraine and the Middle East. Its key advantage — high liquidity — becomes a drawback as investors sell it to raise cash. This is typically followed by a recovery in the XAU/USD uptrend driven by one of the scenarios described above.
In 2022, gold needed about seven months to recover. The pandemic shock lasted roughly the same period. After the largest US tariffs since the 1930s, gold rebounded within a month. What will happen this time? None of the scenarios has materialized yet, so the precious metal will likely remain under pressure for some time.
Weekly Trading Plan for XAU/USD
Moreover, strong US employment data for March would strengthen the US dollar and push Treasury yields higher. In this case, gold may weaken further. As long as XAU/USD trades below 4,735, it makes sense to focus on short positions.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of XAUUSD in real time mode
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