What is good for the dollar is death for gold. In this sense, the strengthening of the US currency after the June FOMC meeting naturally became the main driver of the decline in XAU/USD quotes. At that time, investors did not expect that the Fed would signal that the federal funds rate could be raised as early as 2022. On the eve of the September meeting of the Federal Open Market Committee, none of the options is ruled out. This includes a shift in the consensus estimate on the first act of monetary restriction for the next year.

While the differences between the last and previous global economic crises are obvious, the dollar smile theory works like a clock. The USD benefits during times of stress due to its status as a safe haven asset and during the Fed's rate hike amid the US economic recovery. Between these periods, the USD index, as a rule, decreases, which was the case for 14 months through May.

According to JP Morgan, the dollar is favored on both sides of the smile. On the left is a growing concern that global economic growth has peaked, stocks are overbought, monetary and fiscal support is ending, and China's problems will launch a tsunami on financial markets. On the right is American exclusivity, based on bets. The differential between the real yields of US and German bonds has reached its highest level since June 2020, the gap in indicators with other countries is also widening, contributing to the strengthening of the dollar.

Dynamics of the USD index and differentials of real bond yield

The growing US dollar is a huge problem for gold, but the fall of XAU/USD does not look hopeless yet. Moreover, without the announcement of the curtailment of the $120 billion quantitative easing program and the shift of the FOMC consensus forecast for the first increase in the federal funds rate from 2023 to 2022, the USD index will go into correction, and the precious metal is likely to return above $1,800 per ounce.

The reasons for such stability of gold should be sought in the stability of the US debt market. Unlike in 2013, when the former chairman of the Federal Reserve launched a taper tantrum with a message about the curtailment of QE, the yield on Treasury bonds, at present, stubbornly does not want to grow, which leaves the bulls on XAU/USD hoping for revenge.

Investors are not sure that the start of monetary policy normalization will lead to an increase in US debt market rates. The fact is that the Fed will continue to buy bonds as part of reinvesting income, and the appetite of non-residents for American securities is not going to fade. In April, they bought at auctions about 25% of the debt issued by the Treasury, which is the highest figure for the last three years.

Thus, gold is forced to maneuver between friendly Treasury yields and the hostile US dollar, whose smile is extremely dangerous for bulls on XAU/USD.

Technically, the inability of the precious metal to return within the range of the fair value of $1,775-1,820 per ounce is a sign of their weakness. In this situation, we continue to sell gold with targets at $1,720 and $1,680.

Gold, Daily chart