Despite the seemingly favorable external background in the form of high inflation, record low real rates on US debt, and fears of the COVID-19 delta variant, investors are in no hurry to invest in gold-backed ETFs. According to the World Gold Council, capital outflow from specialized exchange-traded funds of 129 tons in the first half of the year became the main driver of the decline in XAU/USD quotes. Neither the recovery in demand for jewelry nor the increased appetite for precious metals on the part of central banks saved the bulls.

In January-June, regulators bought 333.2 tons of gold, which is 39% higher than the five-year average for this period. The central banks of Thailand, Hungary, and Brazil were especially active.

Central bank gold purchases

Nevertheless, aggregate demand for precious metals in the first half of this year fell by 10% YoY to 1,833 tonnes, and Commerzbank believes that in order to raise XAU/USD quotes, it is necessary to return ETF fans to the market. In my opinion, they follow prices, not form them. As for the favorable external background, this impression is misleading.

When the Fed's balance sheet expanded from $900 billion to $4.5 trillion in 2008-2014, markets were confident that inflation would be accelerating. However, the Federal Reserve, with the help of loans in the form of reverse repo in the amount of $2.6 trillion, reduced the growth rate of the money supply to an average annual 7% and brought inflation to its knees. Over the past three months, the volume of bond buyback transactions increased from $272 billion to $1.2 trillion, reducing the growth rate of the M2 money supply to 4%.

The bulls on XAU/USD should not flatter themselves about the record low real rates on US bonds. There was too much talk at the start of the year that a successful vaccination would spur US GDP and inflation and force investors to ditch these securities. Excessively inflated speculative net shorts resulted in higher prices and a drop in yields. This cannot go on indefinitely. Positioning is coming back to normal, and positive statistics on the US labor market will raise debt rates.

Dynamics of gold and US bond yields

If we add to this the optimistic prospects of the US dollar, on the side of which divergences in the economic growth of the US and the eurozone and in the monetary policy of the Fed and the ECB play, then the future of gold begins to play with gray colors. However, not everyone is sure about the fall in XAU/USD quotes. According to the Quadriga Igneo fund, central banks were so aggressive in the monetary expansion that they created several bubbles in the asset markets at once. To prevent them from bursting, regulators will have to get rid of the stimulus at a snail's pace, and at the first signs of regression, they will increase the scale of QE. This will allow gold to bounce to $3,000 per ounce.

Technically, the "Splash and Shelf" pattern was formed on the daily chart of the analyzed asset. The exit of quotes beyond the lower boundary of the consolidation range of $1,793-$1,830 per ounce is a reason for selling. On the contrary, a breakout of the resistance at $1,830 is a signal for the formation of long positions in gold.

Gold, Daily chart