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’s recent momentum is fading as yields and regain strength.
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The Fed decision could determine whether the pullback extends toward $4,100 or $4,000.
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A recovery above $4,400 would be needed to revive the bullish case.
Gold has started the new week on the back foot, down by around 1% by mid-morning London trade. This comes after the metal fell around 1.8% last week for its third consecutive weekly decline. After the powerful surge in August, the momentum behind the rally is clearly fading, and we could see gold returning back to the $4100 and possibly $4000 area if the macro conditions don’t improve quickly.
The post- recovery in gold did not last on Friday, with prices fading into the close, although the metal still finished the session 0.7% higher. Those gains have since been evaporated so far into today’s session. The macro backdrop is becoming less accommodating, with oil causing dollar to rebound and push up rate hike expectations, and bond yields. Clear headwinds for non-interest bearish assets like gold. The later this week could provide the next major catalyst.
Fed Decision Could Set the Tone
The current trend in gold suggests there may be scope for further moderate losses ahead of Wednesday’s . It is an important policy decision, particularly after the latest inflation data and recent warnings from Kevin Warsh about the risk of inflation remaining above target for too long.
The bigger question for markets is not simply whether rates rise, but what comes afterwards. Would a rate hike be a one-off adjustment, or the beginning of a renewed tightening cycle later this year?
That is important for gold (i.e. the distinction) given the metal’s sensitivity to real yields and expectations for monetary policy.
Oil and Treasury Yields the Main Source of Pressure
have obviously been surging in recent days, despite easing slightly on Friday. The weekend developments or a lack thereof has caused oil prices to gap higher, which means the broader trend remains firmly higher for crude. This is adding a major source of inflationary pressure to an already difficult backdrop.
If inflation continues to prove stubborn, it becomes harder for the Fed to rule out further tightening. That is already being reflected in the bond market, where US Treasury yields have continued to move higher.
came close to 5% last week, a psychologically important level where some profit-taking was hardly surprising. Even so, the underlying direction remains higher, as investors continue to adjust their rate expectations upwards while investors also demand increasing higher reward for holding onto the US debt, which is to say the required rate of return is on the ascendency.
That is not an ideal combination for gold. Higher real yields and a reassessment of the path for interest rates raise the opportunity cost of holding a non-yielding asset, particularly if the dollar continues to find support and equities come under pressure.
Key Gold Levels to Watch
Technically, the bias also remains to the downside. Resistance around $4,400 has once again held, having been tested several times in recent days without a sustained break higher. With the break of the short-term support at $4324 today, this is yet another weakness sign.
A move back towards $4,100 would not be particularly surprising, potentially around Wednesday’s Fed decision. A clear break below that level would bring $4,000 into view, followed by the June low around $3,942.
There is, however, another possibility. Should the dollar-debasement trade regain traction and gold manage to break decisively above $4,400, attention would quickly turn to the $4,500 area.
Above there, the 200-day moving average, currently around $4,538, becomes the next significant reference point, followed by resistance near $4,600.
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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.
