2022年10月31日

Insights

XAU USD: Is gold still a safe haven in 2022?

Why is gold falling against USD? After all, gold and other precious metals are supposed to be safe haven options during times of economic uncertainty. Gold had an epic rally up to $2036 at the beginning of 2020, followed by a 2-year ride full of difficulties. But after Q2 of 2022 got underway, XAUUSD took a dive.

XAUUSD Chart
XAUUSD Chart

So what is happening? There is no shortage in the gold market. Supply chains are mostly intact. Clearly, the bearish XAUUSD is happening because USD is strong, as opposed to gold being weak. But how is that possible in a time when global recession fears are on the rise?

An artificial economy

USD is stronger than it has been in a long time. Breaking even with the Euro and holding at $0.99 is a mystery that is still a surprise to many traders, and continues to baffle analysts and financial journalists the world over.

This unexpected US prosperity comes when the United States is suffering from soaring inflation and rumors of an impending recession. America’s regional news channels speak of student debt, price hikes on consumables, and fuel costs beyond the average person’s budget.

In Q2 and Q3, financial news warned of an imminent economic collapse in America. The UK’s Guardian ran a story about the broken US economy, and even CNBC posted that the US economy has yet to face its biggest recession challenge.

But then, in Q4, all mention of US recession faded away. Today, only confusing and contrasting statistics on rising interest rates and high inflation hit the occasional headline, but a US recession is nowhere on the menu. Even Deloitte says the US economy doesn’t look that bad.

The Fed speaks about the US economy with optimism. The most recent being the jobs report that claims an increase of 528,000 new jobs in just one month. That puts the US unemployment rate at 3.5%, the lowest it’s been since 1969.

So, global media is divided. The world seems to be slowly slipping into a recession, with the exception of the United States. So what is the truth?

Rates and debts don’t lie

Despite dipping into the reserve currency more than once, the US national debt hit $31 trillion with an annual budget deficit of over $1 trillion. The latest Consumer Price Inflation (CPI) report shows that inflation is four times higher than the desirable level, currently standing at 8.2%. A very far cry from the target of 2%. Despite that, USD remains “strong”.

The Federal Reserve interest rate is around 3%, the fifth rate hike of 2022. One of the largest rate increases in decades that put interest rates at a 40-year high last month. And still, the USD remains “strong”.

Even after spending $7 trillion on Covid-19 recovery, and billions of dollars to fund the Ukraine/Russia conflict, the US government still says they will beat inflation. Something doesn’t add up.

Seeding sentiment

One explanation for the news disparity is that the United States is seeding positive sentiment. Sentiment is more powerful than ever before, in all aspects. Just as companies change their CEOs whenever faith is lost, Wall Street is not immune to outside influence, and the global  markets can react to rumor or speculation with rapidity and volatility.

Sentiment is a driving force that can change the world. And when recession fears rise, sentiment can send a country into economic turmoil. But the seeding of positive sentiment, when the reality is contrary, can only work for a short time. Like painting over rust, the truth emerges eventually. 

While temporary, there are reasons behind this strategy. A country that enters a recession with a strong currency fares better than one with an already weakened balance sheet. That country has a better chance of a speedy recovery if everything looks like sunshine and rainbows when “it” hits the fan.

Any positive sentiment, whether factual or otherwise, will certainly help America keep USD strong. Will they be able to keep up the performance long enough to soften the expected 2023 downturn?

Trading XAUUSD: the assumption

First, if the central banks and the US economy eventually reveal a crumbling house of cards, trading major currencies on the stock market won’t offer much of an advantage. When USD weakens, the fallout will smash just about every stock and currency in the world, and may well trigger the recession everybody fears. Which brings us back to whether or not you should buy gold.

Fundamentals are far from a strong indicator right now and should be used to confirm a hypothesis, not create one. Technical analysis is a must, but the XAUUSD charts are a tough read at the moment. 

Instead, keep your finger on the sentiment pulse. Big investors will want to precede the panic phase by moving out of forex prior to a crash. If they time it right, they will get low prices on XAUUSD, and their trading volume might prompt a global USD panic sell that will fuel gold’s rise even more.

Finding the entry point for a XAUUSD buy order will be tricky. Gold might not be at rock bottom just yet, so caution is advised until a reversal or bullish trend starts to form. When business and financial media align with bearish USD forecasts, it might be time to consider gold. Even then, there will be plenty of volatility, so choose leverage carefully and cover yourself with an optimized stop loss.

If gold truly is a safe haven for the next recession, there will be plenty of traders taking advantage of the economic reset, so you’ll need to be ready to act fast and get a good price. As for an exit point, at the first signs of gold price stabilization, take the win and don’t second guess yourself.

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