Investors remembered the previous year with enthusiasm, when working with gold, a simple strategy was relevant: as the FOMC meeting was approaching, at which the federal funds rate was to be raised, it made sense to sell the XAU/USD. On the topic of monetary tightening, the precious metal, on the contrary, was redeemed on the background of the realization of the principle "sell on the rumor, buy on facts". Most likely, nostalgia for the good old days forced speculators to hold their horses on the eve of the Fed's January meeting.

Despite the fact that the futures market implies only a 5% chance of a tightening in monetary policy, previous speeches by FOMC members were "hawkish". In conditions of a strong labor market, the devaluation of the dollar, the rapid rally of Brent and WTI, and the growing yield on Treasury bonds, an indicator of inflationary expectations - even those who are "dovish" began to show less concern about sluggish inflation. PCE can easily accelerate, and in order to contain it, the Fed will have to raise rates, at least three times this year. The CME derivatives implied a 62% chance that this will happen.

If this happened in 2017 and was accompanied by the same rapid rise in the real yield of US Treasury bonds, then the quotes of XAU/USD would fall to $1200 per ounce. To the surprise of investors, gold, on the contrary, notches almost five-month highs, is ready to enter the operational space and reach the mark of $1400. According to the World Gold Council, the precious metal will be able to reconnect with the rates of the US debt market, but for this it will need to move to a new level of prices.

Dynamics of gold and real yield of US bonds

Source: Financial Times.

What's the matter? Why do previous correlations not work? Perhaps, the cryptocurrencies are to blame, whose large-scale selling in January forced fans to look for other safe havens? In my opinion, the weak US dollar was the main driver of the impressive precious metal rally in 2018. In order to see this, it's enough to look at the value of gold in euros. Since July 2017, it has not changed at all.

Dynamics of gold, denominated in euros

Source: Bloomberg.

Is the "Greenback" so weak? The average level of growth of quarterly GDP was slightly less than 3% in April-December, its potential acceleration under the influence of the fiscal stimulus, the reduction of political risks, the monetary tightening of the Fed and attractive rates on US government debt says the opposite. The problem is probably not in the United States, but in other countries and regions where the central banks-competitors of the Federal Reserve gave rise to talk about normalization. If it does not, then gold will begin to lose ground against the backdrop of the dollar gradually returning to the game.

Technically, in order to continue the rally in the direction of $1390 per ounce, it is necessary to update the January peak. The nearest support is located near the $1335 mark.

Gold, daily chart