It is unexpected to see the weakest start of gold since 1991 against the background of inflationary expectations growing by leaps and bounds. The precious metal is traditionally perceived as a hedging instrument against inflation, and the rapid growth of the latter should theoretically increase its share in investment portfolios. Unfortunately, the theory does not always work. Traders believe that there are more interesting assets in 2021 with a defensive function.

It turns out that there are both "bad" and "good" inflation in nature. The first is associated with the depreciation of the US dollar, the second – with hopes for a recovery in global GDP. According to Jerome Powell, rising consumer prices due to increased budget spending and a stronger economy are good problems in a world where demographic and other problems have been reducing inflation for a quarter of a century. If humanity has a bright future, why buy gold?

Fundamentally, the main drivers of the decline in XAU/USD quotes in 2021 and the fall in ETF stocks to their lowest level since July 2020 is the astounding resilience of the US dollar and the rapid growth in Treasury bond yields. The rates on 10-year securities have reached an annual maximum, and the "bearish" forecasts for the dollar, which large banks supplied to their clients at the end of December, have to be postponed for now.

Dynamics of gold and US bond yields

In fact, the precious metal is being replaced by other assets in investment portfolios. At the height of the crisis in March, it was sold to support positions in rapidly falling stocks, and now due to increased demand for other goods. Bloomberg Commodity Spot Index, which tracks 23 commodity market assets, reached its highest level since March 2013. Oil, copper, iron ore are sharply higher due to rumors of a super-cycle. Expectations that demand will grow faster than supply, resulting in widening deficits, push prices up.

Gold has long gone from dependence on the conjuncture of the physical asset market. This is the so-called "paper" asset, where speculators rule the market. Therefore, the precious metal lags behind other goods. It turns out that in conditions of "good inflation" it is better to buy industrial goods or agricultural products, rather than an asset traditionally used as a protection against rising consumer prices.

Thus, the stability of the dollar, the rally in US bond yields, and the replacement of gold with other commodity market instruments are the main drivers of the fall in XAU/USD quotes in 2021. What will save the precious metal? I believe that its short-term growth may be associated with the losing position of the dollar. Despite the strength of the US economy, the USD index is at risk of falling as the US pulls other countries, including the weak Eurozone.

Technically, a Wolfe Wave child pattern is forming on gold's daily chart. Within its framework, purchases on breakouts of resistances at $1,825 and $1,835 with targets at $1,875 and $1,905 are relevant. Selling the precious metal makes sense in case of a successful storming of support at $1,775 per ounce.

Gold, daily chart