Credit Ágricole: Gold - FJElite

Gold has emerged as one of the key beneficiaries from the USD sell-off triggered by the US Treasury’s recent attempts to curb the rise of long­dated UST yields. These efforts included an FX intervention in support of the JPY - which among other things was meant to keep Japanese policy rates low and Japanese investors invested in USTs. We also got signals that the US Treasury would buy long-dated bonds with: (1) the proceeds from sales of short-dated US paper (‘Operation Treasury twist’); or (2) the funds from its account at the Fed (TGA).

The above developments made worse the risk-reward trade-off for UST investors amid rising US debt levels and burnished the appeal of XAU as safe-haven asset. The policy announcements have threatened to flood the market with USD-cash, fanned US inflation fears and lowered US real yields, in a boost to gold as a currency-debasement hedge. If the FOMC further lowers the average duration of its bond holdings as part of its balance sheet overhaul, a ‘Fed operation twist’ could flatten the UST yield curve some more and make short-USD hedges more profitable, in a blow to the USD vs XAU.

Gold should benefit from market fears that the Trump administration will continue to weaponise the USD too. The newest US economic sanctions against Iran and the latest trade tensions between the US and Canada have recently fanned such concerns. We have already seen some EM central banks increase their gold purchases, including central banks of energy importers that sold their XAU-reserves aggressively in search of USD liquidity at the start of the Iran war. The de-dollarisation theme could stage a return as a result, in a boost to XAU.

We remain long XAU/USD as a trade idea and continue to forecast gold to appreciate to USD5000 by the end of year & extend its gains in 2027. We have recently launched Goldilocks, our dashboard dedicated to XAU, on the Red Mount Analytics platform. With the help of this dashboard, you can analyse: (1)the gold price action; (2) the evolution of gold fundamentals; and (3) demand for gold from private investors and central banks.