Gold is being bought as insurance against inflation, but inflation in developed countries has slowed to its lowest level since October 2021. It is acquired out of fear of a recession, but the Federal Reserve and investors expect a soft landing for the U.S. economy. The precious metal gains popularity during financial market turmoil, but the VIX volatility index has not been this low for a long time, indicating a lack of fear. So, what is the reason for the surge of XAU/USD to record highs? Could this movement have been speculative in nature?

Dynamics of VIX Fear Index

Metals Daily believes so. The success of gold is attributed to speculators who dominate the market amid a falling U.S. dollar and Treasury yields. Against this backdrop, hedge funds may not worry about the performance of their operations. Their opening of long positions, followed by closure, caused XAU/USD to ride the roller coaster.

Bank of America shrugs, stating that there are no special fundamental reasons for the precious metal rally. It finds no confirmation in the ETF market. The inventories of specialized exchange-traded funds are decreasing as investors need actual, not presumed, easing of the Federal Reserve's monetary policy.

The previous peak in gold was reached due to concerns about the pandemic and recession. However, investors have become accustomed to military operations in Ukraine, view armed conflict in the Middle East as less frightening than initially thought, and consider the U.S. banking crisis over. Additionally, excessively high prices may reduce consumption in China and India, and high real bond yields may overshadow XAU/USD.

Global Inflation Dynamics

Nevertheless, there are optimists in the market. Commerzbank predicts that the precious metal will remain above the $2,100 per ounce mark for a long time when the Federal Reserve starts cutting rates next year, and JP Morgan believes that the monetary expansion cycle will push prices to $2,300 by the end of 2024 or early 2025.

Indeed, thanks to expectations of a 125 basis points reduction in borrowing costs to 4.25%, gold marked over a 10% rally in October–November, closed in the green for seven out of the last eight weeks, and is ready to show the best performance since 2020 when it rose by 24%. Investors believe that if the Federal Reserve keeps rates flat for a long time, a recession will become inevitable, and the precious metal will play the role of a mediator between stocks and the U.S. dollar. It is not surprising that they are increasing their share of gold in their portfolios as a risk diversification tool.

Technically, on the daily chart, the precious metal has achieved the 161.8% target according to the AB=CD harmonic trading pattern. Subsequently, there was a predictable downward correction. If gold cannot return above the cluster of pivot levels near $2,058 in the next few days, the risks of correction will increase. Nevertheless, rebounds from supports at $2,004 and $1,988 should be used for buying opportunities.