The last time the deficit reversed from a narrowing trend and began a widening trend, back in the early 2000s, it coincided with a major peak in the US dollar index that developed into a major bear market for the dollar that lasted nearly a decade.
- The return of investors to buy safe havens helped XAU/USD (gold) prices to return to timidity to test the $2003 resistance an ounce.
- This happened after the strong selling of the yellow metal, which impacted the $1974 support level at the beginning of this week’s trading.
- The gold market will interact with the price of the US dollar and the future policies of global central banks led by the US Federal Reserve.
Trade Gold Now!
Last week, the US Treasury revealed that the federal deficit amounted to $1.1 trillion in the first half of the fiscal year ending in March, up $432 billion from the same period a year earlier. Moreover, most of that expansion came in March, when spending rose 36% year-over-year (in no small part because of rapidly rising interest costs). In the longer term, there is a clear expansion trend that started in 2015 and now seems to have resumed after some shifts inspired by the pandemic. If history is any guide, this deteriorating fiscal trend should represent a structural bearish impact for the dollar in the coming months and years.
Moreover, the best protection against a deteriorating financial situation (mathematically guaranteed by the rapid growth of Social Security and Medicare spending) is gold. The last time the deficit reversed from a narrowing trend and began a widening trend, back in the early 2000s, it coincided with a major peak in the US dollar index that developed into a major bear market for the dollar that lasted nearly a decade.
This was one of the primary catalysts for a major bull market in the XAU/USD gold price which rose from a low of $250 in 2001 to a high of $2000 almost a decade later. At the moment, investors are not very interested in owning gold (contradictory bullish sign).
As some analysts have pointed out recently, assets in gold ETFs like GLD are a fraction of those invested in ETFs like SPY. However, there is a good chance that the deterioration of the financial situation over time will set investors’ appetite for precious metals on fire over financial assets, just as it did two decades ago.
That is exactly the kind of thing that could support another major bull market for the precious metal.
The downward correction in the XAU/USD (gold) prices may continue towards the support level at $1953 an ounce, which will provide traders with the opportunity to enter into more long positions. The general trend is bullish, which means that investors prefer to avoid short positions. On the upside, we believe that gold prices may resume the upward trend if the price returns to stabilize above the psychological resistance of $2000 an ounce. A new record high is recorded between May and June. The FOMC meeting is the next event to focus on.
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