FX.co ★ When gold to stop its slump resume strong rally. (Gold to rebound after local decline while AUD/USD expected to extend its slide)

Gold prices have been falling steadily since the Fed's policy decision in early March. This sell-off has not even been arrested by the outbreak of war in the Middle East. What happens next, and when will the decline end? Let's break it down.

At the moment, four main factors are driving gold — two bullish and two bearish. We'll start with the bearish ones.

Speculators now expect that the Middle East war will push US inflation higher, which could not only bury the chances of the single rate cut the Fed had indicated in its decision, but even force rates up by the end of the year. That possibility has grown as the conflict between Iran on one side and the US and Israel on the other, drags on and intensifies.

The main transmission channel here is a stronger dollar — not only as a safe-haven currency but as the currency in which gold is traded globally. A stronger dollar is naturally negative for the metal.

Another bearish driver is the typical behaviour of speculators when they see no prospective inflows to support further demand. What does that mean? Gold hit an all-time high at the end of January, leading to large-scale profit-taking and then a prolonged consolidation that failed to spark a fresh leg higher. What do speculators do in that situation? Seeing that growth is not being supported by new money and volumes are not rising, they start selling because speculative assets cannot stay flat for long. Gold is exactly such an asset right now. So, the price drop is in large part the result of profit-taking and speculative positioning.

Now, let's consider the two bullish factors. The first and most important is that gold remains a safe-haven asset amid very high geopolitical tension in the world — tensions that will only worsen if a US- and Israeli-led ground operation becomes inevitable. In that case, after a large correction, we should expect demand to return and a resumption of the upward trend.

The second bullish factor is recognition by large players — above all, central banks — that the world is changing, and that as the dollar's dominance weakens, gold will serve as an active international means of payment.

In practice, these four factors offset each other, but at present, the bearish drivers are in the foreground while the bullish ones have retreated a bit. That said, this imbalance is unlikely to last, and in all probability it will end with a new wave of demand for gold.

Intraday forecast

GOLD

Gold is correcting upward after a sharp one?day plunge today. If it settles below $4,300.00, we can expect a further local fall toward $4,011.65, the 50% Fibonacci retracement. A level to consider selling the rally is $4,259.00.

AUD/USD

The currency pair is testing 0.6950 amid a strong dollar. A drop below this level could pave the way to 0.6900. A level to sell on rallies could be 0.6940.