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07.08.2024 11:16 AM
Gold's mission fulfilled

What happened? Instead of soaring to new record highs, gold plummeted below $2,400 per ounce amid a roller coaster across global financial markets. The global stock market crashed with Japanese stocks suffering the heaviest losses. This collapse made investors recall Black Monday in 1987. In theory, market participants should have rushed to buy up safe-haven assets. But that didn't happen!

For most of the year, the precious metal developed a rally despite strong headwinds. The robust US dollar and rising Treasury yields typically pose challenges for gold. However, the metal confidently traded higher and higher thanks to active purchases by central banks, high demand in Asia, and expectations of monetary easing by the Federal Reserve. The latter factor catalyzed the best capital inflow into ETFs since March 2022 in July, despite the first half of the year being the worst for gold-focused ETFs since 2013.

Capital flow dynamics in gold-focused ETFs

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If the precious metal managed to strengthen against headwinds, it was bound to soar with tailwinds! And market panic seemingly created an excellent opportunity to buy XAU/USD. Alas, the bulls were forced to retreat.

In reality, the issue lies in the speculative nature of various trading instruments. Whenever there is a rapid sell-off, gold commonly bears the brunt. Investors holding it as a hedging instrument in their portfolios sell it to meet margin calls on other instruments, primarily stocks. Once the dust settles, traders buy the precious metal again.

Goldman Sachs agrees with this view. Indeed, the need to avoid margin calls forces investors to get rid of gold temporarily. Commerzbank notes that the XAU/USD decline was driven by sell-offs of other assets. JP Morgan recommends buying the metal on dips.

There is no real reason for panic. Even if a recession hits the US, gold will benefit as a safe-haven asset. It will capitalize on the weakness of the US dollar and the drop in Treasury yields. As evidence, we remind you of the capital inflow into ETFs of 125,000 ounces during Black Monday.

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If the Federal Reserve ensures a soft landing, the US economy will still cool down. So, the federal funds rate will be slashes. This creates a favorable environment for XAU/USD. Donald Trump's victory in the presidential election in November will boost demand for gold as a safe-haven asset. On the contrary, his defeat will allow the Federal Reserve to ease monetary policy with a clear conscience, which is great news for the precious metal.

Technical analysis of gold

Technically, a Double Top reversal pattern was played out on the daily chart, leading to a correction. However, this does not indicate a trend reversal. So, it is advisable to wait until the price recovers above $2,408 and $2,416 per ounce for buying opportunities.

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