Notably, gold reached a zenith one day before escalating tensions between Israel and Iran, marked by a Volume Spread Analysis (VSA) signal on the daily charts. An ‘Upthrust Bar,’ typically indicative of a selling climax, foreshadowed what was to come. Merely a week later, gold began a short-term collapse, a stark contrast to its prior bullish momentum.
The Technical Tell: VSA Signals and Market Sentiment
The attached VSA signals, including ‘UT’ (Upthrust Bar) and ‘SCE’ (Sell Condition Exists), suggest a bearish outlook. Following these indicators, gold has indeed embarked on a downward rally, countering the once-dominant narrative of global tensions bolstering the precious metal’s appeal. The prevailing sentiment now hints at a subsiding of geopolitical strains, prompting a recalibration of risk among investors.
China’s Strategic Shift: From U.S. Treasuries to Gold
Amid this market repositioning, a significant narrative has emerged involving China’s financial strategy. The Asian giant has been actively shedding U.S. Treasuries — $22.7 billion offloaded in February alone, bringing their holdings down to $775 billion. Simultaneously, China has been accumulating gold, with the People’s Bank of China adding to its reserves for 16 consecutive months. China’s move towards gold, and away from U.S. debt, may be a strategic hedge against potential U.S. financial sanctions and underscores a diversification away from dollar-denominated assets.
Implications for the U.S. Treasury and Global Investors
This strategic pivot raises a pressing question: who will finance the U.S. government’s borrowing in the absence of one of its largest foreign creditors? With the Federal Reserve stepping back from the bond market, the U.S. Treasury faces a conundrum. The Treasury’s growing yields and the federal government’s increasing interest payments — up 35.9 percent from fiscal 2023 — suggest potential fiscal challenges ahead.
The Inflation Tax: A Future Certainty?
As gold trends downward and China reallocates its reserves, the U.S. may have to resume quantitative easing to sustain its borrowing needs, a move that will likely stoke inflation further. This implies that the public could bear the brunt of these developments through an inflation tax, an indirect cost of the government’s debt-fueled growth strategy.
Market Outlook and Investor Strategy
As the market grapples with these dynamics, the short-term bearish outlook for gold appears to align with a broader market expectation of risk normalization. However, investors should remain vigilant. The long-term implications of China’s treasury divestment and gold accumulation, coupled with possible shifts in U.S. monetary policy, could introduce new volatility in both the bond and gold markets.
