Forecast for Gold Prices: XAU/USD Lacks Directional Conviction in the Face of Conflicting Market Forces

Fundamental Outlook for the Gold Price: Neutral

• Gold prices increased by roughly 0.7 percent week on week to around $1945.

• The strength of the US currency and rising yields were countered by geopolitical risk and recession fears.

• In the short run, conflicting market pressures create a neutral leaning toward gold.

Gold prices (XAU/USD) increased 0.7 percent week on week to 1,945$, amid broad-based US currency gains and rising rates. The DXY Index increased by 1.3 percent over the five-day period, while the Treasury curve swung dramatically higher after the Federal Reserve signaled unequivocally that it is leaning toward front-loading rates and outlined an aggressive plan to shrink its balance sheet in order to contain inflation.

Typically, the strength of the greenback in the currency market combined with rising nominal and real yields should be sufficient to undercut precious metals, which do not pay coupons, dividends, or provide actual cash flows. However, these are not typical times, to put it mildly.

To begin, the geopolitical premium built into the market in the aftermath of the invasion of Ukraine has kept some defensive assets prices afloat. Although the military confrontation has remained relatively calm in recent days, it is still raging and its atrocities are spreading. Although it is difficult to anticipate how the crisis will unfold, some investors fear that the worst is yet to come and are hence hesitant to begin selling safe-haven assets.

Another reason gold has maintained its support is increased fear of recession. Numerous Wall Street analysts are growing concerned that the Fed will be unable to reduce consumer prices without precipitating a serious slump. Whether or not those predictions are justified, traders are hedging against potential negative risks due to fragile sentiment reflected in high volatility and weakness in markets.

Conflicting market dynamics will keep gold from moving appreciably higher or lower until one of the catalysts gains an edge and a clear superiority over the other.

This indicates that the XAU/USD trade forecast is neutral in the near future. In this setting, prices are likely to remain stuck near present levels in the coming days, lack directional confidence, and exhibit range behavior.

The week ahead features several high-impact economic reports, but the latest inflation number is expected to garner the most attention. The headline CPI, which is scheduled to be released on Tuesday, is expected to increase from 7.9 percent year over year in February to 8.4 percent year over year in March, the highest level since early 1982.

While a hot CPI reading may trigger a bullish knee-jerk reaction in gold, gains may be short-lived as investors become convinced that the Fed will act aggressively to raise borrowing costs to neutral quickly, with over 225 basis points of monetary tightening already priced in for the remainder of the year.

On the other side, a weaker-than-expected CPI figure might confirm the current decrease in inflation breakeven rates, so pushing real yields higher, putting some short negative pressure on XAU/USD (for reference, the 10-year TIP has surged over the past month and is almost positive, rising from a low of -1.08 percent in March 8 to -0.179 percent before the weekend).