How will gold react when the Fed's balance sheet is reduced

At the upcoming FOMC meeting, we will probably see Fed's first attempts to reduce its large balance. Against the backdrop of threats from North Korea and the cheap dollar, gold marked a two-year high, but after threats subsided and the dollar stabilized, gold entered a period of correction.

The main question now is how will gold react to the Fed's decision tomorrow? Or in other words, will the Fed's decision lead to inflation or deflation?

In the last bullish momentum of gold, the dollar was on a down trend, and the ECB was pursuing tougher monetary policy, which was typical of central banks in the aftermath of the 2008 crisis. Then gold of nearly $700 rose to $1,900 in 2011. On the other hand, investors lost confidence in the financial system during this period, which further supported gold.

But now investors believe in the financial system and any argument against a new bullish gold market is based on the belief that central banks are dealing with global liquidity problems and can prevent any potential collapse.

By cutting QE, the Federal Reserve hopes for higher inflation by putting more dollars back into the financial system and raising interest rates, which means a weaker dollar and hence a rise in gold.

The downward trend in the dollar is not over yet, but the attitudes in the Fed are for a stronger dollar in the future. Capital is still running out of the US, and the political and fiscal landscape in the country seems suspicious. In the long run, this will create the next gold bull market. Profit variations between the United States, Europe, and Japan will drive capital back to the US, and gold will respond positively to it once investors lose faith in one of the three central banks.

What does gold look like right now?
Gold fell by $ 50 on its last peak as the dollar reports growth and geopolitical tension has fallen. In addition, US tax reform is increasingly likely to be voted on in Congress. Technically, gold is located near a support zone, which if it does not last, will follow a deeper adjustment. On a monthly chart, the gold forms a Double Top formation, and while investors believe in the financial system, the bulls in gold are good to comply with this formation. Regarding the good side, a possible adjustment will provide a good opportunity for purchases of shares directly related to the extraction or processing of gold.

Source: Bloomberg Pro Terminal

Jr Trader Petar Milanov

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