Will central banks risk rate hikes to combat inflation if they can simultaneously pierce asset-market bubbles they have created? The fate of gold depends on the answer to this question. The precious metal showed its best performance in May in the last 10 months, sincerely believing that the Fed will not take this kind of risk. Jerome Powell and his colleagues continue to convince investors of the temporary nature of the acceleration of inflation, knowing full well that if they tighten monetary policy, the story of the 2013 "taper tantrum" will repeat itself.

Extremely negative real rates, high inflation, and low nominal US Treasury yields are a favorable environment for the precious metal, which, after a bad start in 2021, managed to lick all its wounds as the year approaches the equator. ETF stocks, after several months of outflows, rose in May, and hedge funds, as in the good old days, are actively increasing their longs.

Dynamics of speculative positions in gold and ETF stocks

The collapse of bitcoin played an important role in the rapid growth of XAU/USD quotes, which fell from the levels of historical highs by about 40% due to the speeches of Elon Musk and the restrictions of the cryptocurrency market from China. Many were quick to describe the sector leader as a new hedging tool against inflation, but recent events have proven their views are wrong.

Bitcoin and gold dynamics

If we add to this the growth of Chinese net imports through Hong Kong in April to 52.8 tons, which is the highest level since June 2018, then there should be no questions as to why gold is growing. Another thing is that in the short term, it can go for a correction. Failure of the bulls to catch on to the $1,900 per ounce mark will increase the likelihood of a pullback.

The reasons should be sought in the expectations of strong statistics on the US labor market for May. Bloomberg experts predict an increase in employment outside the agricultural sector by 650,000, which will potentially lead to higher bond yields and the strengthening of the US dollar on fears that the Fed will begin to normalize monetary policy earlier than market participants currently expect. In fact, this approach is the old-fashioned approach. When inflation rises and the economy warms up, the central bank removes the punch bowl in the midst of a feast. Now, the central bank will not do this, which allows it to use strong statistics on the US labor market to buy XAU/USD on pullbacks.

In fact, the fate of the US quantitative easing program is a foregone conclusion. In June, the FOMC will begin discussions on tapering QE, and at the end of the summer, at the conference of the heads of central banks in Jackson Hole, Jerome Powell will announce the start of this process. Another thing is that the Fed will in any case remain present in the US debt market, which will limit the growth of bond yields and continue to support the precious metal.

Technically, signals for buying gold with the target of $2,020 per ounce according to the Wolfe Wave pattern will be a breakout of resistance at $1,910 or a rebound from moving averages.

Gold, Daily chart