The failure of the dollar smile theory opens up truly limitless prospects for gold. Investors used to believe that in times of recessions, the US currency behaves according to a template: first it grows due to the flight of investors to safe haven assets, then it falls against the background of a huge monetary stimulus from the Fed, and third, it strengthens again due to the outpacing pace of recovery of the US economy over its global counterparts. Unfortunately, in 2020, everything went wrong. The tense epidemiological situation in the United States suggests that US GDP will return to the trend much later than the Eurozone economy. As a result, the USD index falls, and the precious metal does not get tired of rewriting records.
The dollar has enough vulnerabilities, including rising government spending, an increase in the budget deficit to 18% of GDP, extremely loose monetary policy, and a difficult economic recovery. The inefficiency of American management and the uncertainty surrounding the US presidential election play an important role. In contrast, the main competitor of "American" in the face of the euro relies heavily on the unity of the EU, faith in diversification of foreign exchange reserves by central banks in their favor and investment portfolios in favor of securities issued in the Old World.
At the same time, the Fed's intention to keep the federal funds rate close to zero for as long as it takes does not allow Treasury bond yields to rise. That is, it deprives them of trumps in the fight against the precious metal. As history shows, low rates of the Central Bank create a favorable background for "bulls" in XAU/USD.
Dynamics of the federal funds rate
Thus, the weakness of the US dollar and record low rates of the global debt market allowed gold to climb to a height that takes your breath away. There will be plenty of reasons in the near future. The approval by the US Congress of an additional package of fiscal assistance and (or) strong statistics on US employment will allow us to look at the economy differently and exit the longs for XAU/USD.
The July report on the labor market is a very significant event from a political point of view. If employment does not grow as quickly as in May-June, the White House will again return to the mantra of a V-shaped recovery of the US economy, which will be a strong argument in favor of the re-election of Donald Trump in November. On the contrary, weak data will strengthen the position of Democrat Joe Biden. He will have the right to say that the methods used by the current American administration do not work, and it is time to change it. Gold will not remain indifferent to the release. Disappointing statistics will allow it to swing to a new historical high of $ 2440 per ounce, where the target is located at 161.8% on the AB=CD pattern, and a strong one will trigger a correction mechanism: a break in support at $ 2000-2010 will signal short-term sales in the direction of $ 1970 and $ 1935.
Gold, the daily chart