Gold rallied to two-month highs ahead of the inflation reports, only to pull back immediately after the data was released. This seemingly paradoxical move raises a question: is XAU/USD getting carried away by its own euphoria? Let’s discuss this topic and outline a trading plan.
The article covers the following subjects:
Major Takeaways
- The odds of a September Fed rate hike have fallen to 32%.
- A weak labor market has fueled investors’ stagflation concerns.
- UBS and the LBMA expect gold to trade in the $4,500–$5,000 per ounce range.
- A move above $4,415 would offer a new buying opportunity.
Weekly Fundamental Forecast for Gold
Did gold get ahead of itself by surging to two-month highs before the US inflation reports? Was this a case of “buy the rumor, sell the fact,” with the precious metal retreating despite favorable data? The reaction of XAU/USD does look unusual, but it reflects strong confidence that gold is in a win-win position.
US Inflation Trends
Source: Wall Street Journal.
History shows that the precious metal tends to thrive in a stagflationary environment. When the economy slows while inflation surges, the Fed faces a dilemma: should it cut rates or raise them? Gold benefits from the central bank’s hesitation and reaches new highs. This time, the Fed has abandoned the idea of tightening monetary policy. The odds of a September rate hike have fallen from 75% to 32% over the past month.
Meanwhile, falling employment pointed to a potential economic slowdown, putting XAU/USD in a favorable position ahead of the inflation data. If inflation accelerated, stagflation concerns would support gold. If it slowed, the precious metal would benefit from the Fed holding rates steady. In the end, investors bought the rumor and sold the fact after the CPI and PPI data were released.
In fact, the declining probability of monetary tightening is good news for the precious metal. However, the prospect of interest rates remaining high for an extended period is limiting XAU/USD‘s upside potential. LBMA experts expect gold to rise to $4,500 per ounce by the end of the year, with the highest forecast at $5,100 and the lowest at $3,879.
UBS expects gold to reach $5,000 per ounce in the first half of 2027, as the Fed is expected to keep rates unchanged this year and consider cutting them next year. Meanwhile, falling real Treasury yields would boost investment demand for the precious metal.
In my view, the main risks to the XAU/USD rally are geopolitics and stronger US GDP growth. The US economy slowed significantly in the second quarter, while stock indices are hitting record highs. This divergence usually points to either a bubble or unrealized economic growth potential. There appears to be no bubble, as the P/E ratio is declining amid strong corporate earnings.
Thus, XAU/USD breaking out of consolidation is a positive sign, but the fundamental backdrop remains fragile.
Weekly Trading Plan for Gold
Under these conditions, it makes sense to hold the gold long positions opened at $4,160 per ounce and built up ahead of the US inflation data. A return of XAU/USD above $4,415 would provide another opportunity to buy.
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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