Trade Of The Week: Will Gold Prices See More Pain?

The past few weeks have certainly not been kind to gold.

After almost kissing the psychological $2000 level back in mid-April, bulls ran out of steam – allowing bears to drag the precious metal to prices not seen since February 2022!

Last Friday’s strong US report compounded gold’s woes as expectations intensified over the Federal Reserve maintaining an aggressive approach towards monetary policy. This report was published two days after the Fed raised interest rates by 0.50 bps points for the first time since 2000.

With the dollar climbing to its highest level in two decades and treasury yields rising amid expectations the Fed may continue hiking rates to tame inflation, gold could be in trouble.

The week ahead promises to be eventful for the precious metal thanks to key US economic data, speeches by Fed officials, and ongoing geopolitical risks.

On the technical front, the path of least resistance points south with prices wobbling above the $1855 support as of writing. Although the balance of power currently swings in favour of bears, bulls could still strike in the right conditions.

Before we cover what to expect from gold over the next few days, it is worth keeping in mind that the precious metal has dropped roughly 6% since the 18th of April when prices almost hit $2000.

Gold is down almost 2% month-to-date and has extended its longest run of weekly losses this year.

With the 10-year Treasury yield rising to its highest level since November 2018, gold may struggle to shine. It’s worth keeping in mind that the precious metal offers no yield, making it less attractive for investors to own in an environment of rising Treasury yields.

US Inflation data & Fed speeches in focus 

The major risk event for gold may be the pending US CPI report.

Given how markets remain highly sensitive to inflation fears, the report could spark explosive levels of volatility in gold. The key question is whether the report will send the precious metal tumbling or provide a lifeline. According to an economist’s poll by Bloomberg, US inflation is expected to rise 8.1% year-on-year in April compared with 8.5% in March. A figure that exceeds market expectations could send the dollar higher, enforcing downside pressures on gold prices. Expect the gold to also feel the burn if speeches from Fed officials over the next few days revive expectations around a 75 basis-point rate hike in June.

Geopolitical risks could provide cushion 

The heightened levels of uncertainty and volatility caused by geopolitical risks could direct investors towards gold’s safe embrace.

As the Russia-Ukraine conflict continues, global sentiment is likely to remain shaky with investors adopting a guarded approach toward riskier assets. Inflationary worries and increasing concerns relating to China could fuel the risk-off sentiment – lending some support to gold. Will this support be enough to counter the pressure created by an appreciating dollar, rising treasury yields, and Fed rate hike bets? Time will tell.

Gold ETFs favour bears 

According to an automated report from Bloomberg, gold ETFs cut 66,718 troy ounces of golf from their holdings last Friday, bringing this year’s net purchases to 8.42 million ounces.

The outflows could be the product of the strong US jobs report which boosted Fed rate hike bets and an appreciating dollar. A gold ETF provides investors exposure to gold without owning it physically. In this instance, outflows from ETFs are seen as bearish for the underlying asset.

Gold breakdown on the horizon?

The subtitle says it all.

Gold remains under pressure on the daily charts with prices wobbling above the $1855 support as of writing. Over the past few weeks, the precious metal has been battered by a stronger dollar, rising treasury yields, and Fed rate hike bets. Prices are bearish with a breakdown below $1855 opening a path towards $1820 and $1780. Should $1855 prove to be reliable support, prices may rebound back towards $1900 and $1920.

Zooming out on the monthly charts, prices remain in a wide range with support around $1700 and resistance at $2000. A major directional catalyst may be needed for gold to secure a monthly close above or below these key levels.