Everything is relative in this world. Although gold has lost about 11% of its value in 2022, it is better than stocks or bonds. What, no matter how the precious metal, is a means of protecting wealth and insurance against inflation? Even despite the extremely unfavorable background, XAUUSD retreats reluctantly. The bulls are fighting for every dollar, and as the global recession approaches, the chances of saving gold increase everyday.

Since the start of the Fed's monetary policy tightening cycle, long-term inflation expectations have been securely anchored at around 2.5%, which is what the Central Bank required. At the same time, aggressive rate hikes around the world turned into a meteoric rally in bond yields. The cost of storing precious metals in ETFs is growing, and it does not generate interest income. Should we be surprised at the outflow of gold from specialized exchange-traded funds?

The 10-year US Treasury yield, for the first time since 2010, exceeded the 4% mark. With inflation expectations at anchor, real debt rates are climbing ever higher. In such conditions, gold usually falls like a stone, but now it is resisting. Even against the backdrop of the rapid strengthening of the US dollar, the US dollar receives preferences both as a safe-haven asset and as a currency whose Central Bank is conducting aggressive monetary restrictions. The precious metal should be seriously affected in such conditions, but it clings to any straw.

Dynamics of gold and US dollar

But the Fed is not going to stop! St. Louis Fed President James Bullard says the federal funds rate should reach 4.5% as soon as possible as confidence in the Fed is under threat. Indeed, there is an opinion that gold will start to rise after the Central Bank realizes that it cannot control inflation. Minneapolis Fed President Neel Kashkari will not repeat the same old mistakes. Kashkari said the Fed decided in the 1970s that it had done its job, looking at slowing inflation and the economy, and was punished for it. His colleague, Chicago Fed President Charles Evans, says rates will hit a ceiling by spring, after which the central bank will be able to sit on the sidelines.

Looking at rising bond yields, a stronger US dollar, and hawkish rhetoric from FOMC members, hedge funds are never tired of getting rid of gold. "Bearish" sentiment in the market reached a 4-year high. As of September 20, speculators reduced the size of net longs to the lowest level since November 2018.

In my opinion, the reluctance of XAUUSD to fall as fast as the US securities market requires, indicates that the risks of recession and the escalation of the conflict in Ukraine force investors to keep precious metals in portfolios.

Technically, on the daily chart of gold, quotes approached the previously indicated target at $1,600 per ounce at arm's length. I believe that the potential of the downward movement is not revealed, and the expected stop will be at the level of $1,590 or $1,575. The recommendation is to keep shorts.