With the highest inflation in the United States in four decades, the armed conflict in Ukraine, and the risks of a recession in the global economy growing by leaps and bounds—it would seem that what could be better for gold? The precious metal is considered a tool for hedging geopolitical, inflationary, and other risks, and a favorable external background should theoretically be the basis for its purchases. However, XAUUSD quotes are falling to the area of 6-month lows. Gold is losing out to other safe-haven assets, and it doesn't look like things will change anytime soon.

Speculators continue to get rid of the precious metal, reducing their net long positions by 15,000 lots to 47,000 lots in the week of July 1, with the bulk of the volume driven by new short sales. For hedge funds, a strong US dollar and high Treasury yields are more compelling arguments than the war in Eastern Europe or the soaring inflation in US and Europe above 8%.

Dynamics of speculative positions in gold

If, during stagflation, gold was losing the competition to the US currency, then during the times of increased risks of an imminent recession, it had much more worthy opponents. US Treasury bonds, the Japanese yen, and the Swiss franc are pulling in money from around the world, while capital outflows from precious metal-oriented ETFs have been going on for eight of the last ten weeks. Before this, it was about the inflow within 14 five-day periods.

During inflation, it's not the numbers that matter but how the Fed reacts to them. Jerome Powell and his colleagues do not want to make the same mistake repeatedly. They took into account the bad experience of their predecessors, who in the 1970s initially acted very cautiously, with an eye on the economy, and then forced to raise rates aggressively. These led to the most severe rise in unemployment since the 1930s. The central bank intends to break inflationary thinking so that it does not gain a foothold in the economy. To do this, you will have to sacrifice the labor market and, possibly, plunge the States into a recession. However, you should choose the lesser of two evils.

Dynamics of US inflation expectations

The growth of the USD index is facilitated not only by the determination of the Federal Reserve. The euro feels extremely uncomfortable against the background of a new round of the energy crisis and the ECB's caution. The share of the euro in the structure of the USD index is 57%, so the fall of the EURUSD to the 20-year bottom area could not but affect the indicator. Since gold is quoted in dollars, the strengthening of the US currency, as a rule, leads to its decline.

Technically, the Broadening Wedge pattern has worked out on the gold's daily chart. After a pullback to the 23.6% and 38.2% Fibonacci levels from waves 4–5, the downward trend resumed. Gold is heading towards the pivot points at $1720 and $1705 an ounce. In this regard, I recommend holding short positions formed from $1805 and periodically increasing them on pullbacks.