Financial markets' interest in reflation trading is gradually fading, giving way to caution. The Fed has made its position quite clear: it is not going to abandon monetary stimulus and believes that the surge in inflation will be low and short-lived. As a result, investors are wondering: if the stock indexes have been running ahead of themselves for a long time, isn't it time to take a break? In such muddy water, gold is trying to catch a fish. And it should be noted that in the week of March 19, it succeeded – the precious metal closed in the green zone.

Gold weekly dynamics

If gold was resilient when bond yields and the US dollar rallied in sync, why shouldn't it continue to consolidate as they begin to tug of war? The USD index is rising, while debt market rates, on the contrary, are going down due to concerns about the third wave of COVID-19, prolongation of lockdowns in France and Germany, as well as tensions between Washington and Beijing. According to Bloomberg estimates, China has purchased $123 billion worth of US goods in the 14 months since the trade agreement was signed in January 2020, which is 32.6% of the target. This cannot please the US, whose tone at the talks in Alaska was cold.

It should be noted that one of the reasons for the decline in profitability is the fall in inflationary expectations, which is due to sales in the oil market. Up to this point, inflation expectations for the first 5 years were ahead of their counterparts for the next 5 years. This is entirely in line with the Fed's mindset that the PCE surge will be short-lived. Say, the world over the past 4 decades has lived in conditions of suppressed inflation, can it accelerate due to one-time fiscal stimulus? Jerome Powell and Janet Yellen think not.

Dynamics of inflationary expectations in the USA

In my opinion, gold is showing resilience, as it has not lost faith that consumer prices, including due to the 2020 low base effect, can rise significantly. Nevertheless, it is inappropriate to talk about the recovery of the upward trend. The best strategy in such an environment is to sell XAU/USD on the upside. Moreover, the main opponents of the precious metal in the face of the dollar and the yield of US bonds feel confident.

The US administration is considering $3 trillion in additional fiscal stimulus for infrastructure, which will require money in the form of higher taxes and new loans. In order to attract foreigners to the debt market, the Treasury needs high rates and/or a weak dollar. I think the current level of bond yields is enough to lure non-residents.

Technically, gold's inability to break above $1,755 an ounce indicates its weakness. The shorts formed on the rebound from this level, within the framework of the recommendations voiced in the previous material, I propose to keep and increase in the event of a drop in quotes below $1,710. The target of the downward movement is 161.8% on the AB=CD pattern, located near $1,645.

Gold, daily chart