Gold has demonstrated multidirectional dynamics in the past three weeks, despite a rich fundamental backdrop. Under normal circumstances, it could well become not only a source of increased volatility but also a full-fledged trend.
The XAU/USD pair keeps consolidating in the $1920-1940 range, which reflects the market's indecisiveness against an uncertain backdrop and contradictory data. On the one hand, the growth of the asset should be facilitated by geopolitical tensions driven by the events in Eastern Europe as well as rising inflation which is widespread and persistent.
This should force traders to look for alternative investments to diversify their portfolios and hedge against risks. On the other hand, further gold growth is hampered by rising U.S. Treasury yields and the strengthening U.S. dollar.
This uncertainty undermined the traders' confidence in the bullish outlook for the precious metals market. According to the World Gold Council (WGC), global central banks actively sold gold from their reserves in the first quarter of 2022, something not seen since 2020. Uzbekistan and Kazakhstan were the largest sellers in February.
Uzbekistan sold 22 tons, and Kazakhstan - sold 21 tons. The latter reduced its gold reserves to the lowest level since 2020. Net purchases were dominated by Turkey, which added 25t to its gold reserves in February. India bought 2.6t during the month, while Ireland, the only active developed market buyer, added 1t of gold to its reserves.
The U.S. Commodity Futures Trading Commission (CFTC) confirms the global sell-off trend. According to last week's report, the number of long gold positions amounted to 84.55K, while short sales reached 335K. Weekly dynamics also show a build-up in short gold positions by 772K and a 5.8K decrease among gold buyers.
In addition to the undermined confidence of institutional traders, the strengthening of the U.S. dollar, which keeps hitting multi-year highs against a basket of other major currencies, suggests a high probability of a further decline in gold.
Interest in the dollar is fueled by expectations of aggressive monetary policy tightening by the Federal Reserve to curb inflation, which reached its highest in nearly 40 years. Traders continue to price in the prospect of a 0.5% rate increase. The decision on a rate hike will be made at the Fed's next meeting in May.
This stance is supported by the majority of the FOMC voting members. On Tuesday, U.S. Federal Reserve board member Lael Brainard said she expects a speedy reduction in the balance sheet, which now stands at nearly $9 trillion, and a steady interest rate increase.
Such rhetoric drove U.S. bond yields to their highest levels since 2019, which further supported the dollar and reduced the attractiveness of gold, which does not provide a coupon payment or generate interest income. We recommend holding short positions in XAU/USD with a target of $1850-1870.