Proponents of fundamental analysis argued that gold's attempts to break above $1,900 an ounce were caused by technical factors. Today, technical analysts predict a drop in the precious metal to $1,800 in the event of a breakout of support at $1,850, and Commerzbank argues that if Fed Chairman Jerome Powell adheres to the current position of the Central Bank regarding the temporary acceleration of inflation and the absence of the need to roll back monetary stimulus, the "bulls" on XAU/USD will have the opportunity to win back losses. The market is a mess. Is it any wonder if the connections that have been working for decades are collapsing like a house of cards?

The real return on investment is nothing more than the opportunity cost of owning gold that does not generate interest. That is why the precious metal has been following the real yield of US Treasury bonds for years. Its fall to record lows in 2020 allowed it to reach a new historical peak. Its growth at the beginning of 2021 caused the "bulls" on XAU/USD to mark the worst start in recent years. In April-May, US inflation accelerated, real debt rates went down, and gold managed to lick its wounds.

Dynamics of gold, inflation expectations, and US bond yields

In June, everything turned upside down. As inflation accelerated, investors played out the fact and closed short positions on US Treasury bonds, which resulted in a decline in bond yields and, at first glance, a paradoxical rise in the dollar and a collapse in gold. In fact, if the market felt that the sale of debt obligations went too far, then why not think the same about the US currency and precious metals? The catalyst was rumors that the Fed, at the June meeting, will shift the date of the first increase in the federal funds rate from 2024 to 2023. The precious metal was seriously affected by the tapering of US QE in 2013 and from monetary restriction in 2015-2018, so this kind of talk became a bucket of cold water for the "bulls" on XAU/USD.

In my opinion, the market needs to come to its senses, and the Fed can help do this. The central bank will continue to move at a snail's pace, fearing a repeat of the story with the taper tantrum eight years ago. Jerome Powell and his colleagues are likely to announce a QE rollback in August or September, start doing so around the turn of 2021-2022, and not raise rates until 2023. Gold may feel safe, especially as the inflation crackdown continues unabated.

For the current prices of the analyzed asset to look reasonable, the yield on 10-year US Treasury bonds should rise to at least 1.75% at current inflation levels. The precious metal is starting to look cheap, so its further peak will lead to an increase in the number of buyers.

Technically, the correction in gold is associated with the implementation of the 1-2-3 pattern, while its return above $1,875 or unsuccessful support tests at $1,830-$1,835 and $1,810 per ounce will be signals for the opening of medium-term longs with targets indicated by the "Wolf Wave" pattern.

Gold, Daily chart