Gold hedges risks. Forecast as of 20.10.2023

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In October, gold stopped reacting to inflation, the Fed’s policy, or US exclusivity. The XAUUSD quotes are rising amid the Middle East crisis. What’s coming next? Let’s discuss it and make a trading plan.

Monthly fundamental forecast for gold

The stock market behaves as if the Middle East crisis hadn’t escalated. Stocks are soaring on the US strong macro-stats and the belief the Goldilocks regime will be resumed in the markets. Bonds are declining on the risk of new Fed restrictions. Investors seem to prefer standing aside and waiting for new developments to reacting sharply. It could be a sign of wisdom, but risks should still be hedged. Buying the XAUUSD looks like the best hedging option.

If the markets had started panicking over prospective large-scale military actions in the Middle East, bond yields could fall, and such safe-haven assets as the yen and the franc would consolidate, let alone the USD. However, the fear index VIX has hardly started moving, while stock indexes feel good at the current levels. Ten-year bond yields are approaching the psychological level of 5%.

VIX index trends

Source: Bloomberg.

Dynamics of US bond yields

Source: Bloomberg.

There’s a misleading impression of overall calmness. It could be “the calm before the storm,” and further developments will lead to some tectonism in the market. But investors haven’t seemed over-concerned about the situation in the Middle East so far. In fact, that’s not true. Investors have been hedging the risk of further escalations by increasing gold shares in their portfolios. Thus, the 8% rally from October trough levels isn’t surprising.

What’s next? Everything will depend on Israel’s tactics. Three scenarios could play out.

  1. Israel fires missiles at Gaza, turning it into a kind of Tokyo or Dresden from 1945 and causing numerous civilian deaths.
  2. Israel organizes a ground invasion, risking to have a significant part of 300 thousand military reservists killed and to be totally defeated.
  3. Israel surgically liquidates the HAMAS leaders, like in 1972 when Jerusalem liquidated some other terrorist organizations following the murder of Israeli Olympic athletes.

Monthly trading plan for gold

The markets hope for the third scenario, which is the likeliest to play out as suggested by numerous high-ranking US and European delegations traveling to the Middle East these days. If so, the gold will touch the ceiling and hardly break above $2,000 an ounce.

But if the mass bombing of Gaza or a ground invasion happens, the stock, commodity, and currency markets will be raging, and the XAUUSD will have an opportunity to update its historical highs. Anyway, having bought gold at $1,825 an ounce at the end of September looks like a wise investment. I recommend holding longs and building them up on retracements.

Price chart of XAUUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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