Gold prices have fallen below their 200-day moving average, and if US inflation pressures heat up more than anticipated this week, the precious metal could test a major support level at $4,000 per ounce, according to a report from an analyst at Forex.com on Monday.
Following the sell-off last week, the technical picture for gold has significantly deteriorated, the analyst noted. The metal consistently failed to hold above the $4,500 level, ultimately facing the risk of a deeper correction, with the breach of the 200-day moving average further accelerating the downward momentum.
The next major support zone is a long-term trendline around $4,230 per ounce. If sellers continue to dominate the market, a more pronounced decline could occur. Given the current market structure, a drop to the psychologically significant $4,000 level cannot be ruled out.
Short-term bearish sentiment is rising as the market awaits the US Consumer Price Index (CPI) report due on Wednesday. Market expectations are for core inflation to show a year-on-year increase of 2.9%.
Another strong inflation reading could reinforce market expectations that interest rates will remain elevated for an extended period. This scenario would likely provide further support for the US dollar while simultaneously putting pressure on precious metals.
Gold futures traded within a narrow range on Monday, following a weekly decline of nearly 5%. This drop came after an escalation in the Iran-Israel conflict threatened peace talks, though both sides later agreed to pause hostilities. However, robust US jobs data boosted expectations for Federal Reserve rate hikes, weighing on gold prices.
While gold is traditionally seen as a safe-haven asset during wartime, a peace agreement would reduce the risk of energy-driven inflation and alleviate pressure on central banks to maintain high interest rates. Gold itself does not generate interest income, so a high-rate environment typically suppresses its price.
Entering June, as expectations for Fed rate hikes intensified, gold's decline accelerated markedly, nearly erasing all its gains for the year. Spot gold edged up 0.04% on Monday to $4,329.83 per ounce, while spot silver traded at $68.171 per ounce.
Gold's Opportunity Amid Rate Hike Concerns
Despite the prevailing headwinds, a report from the World Gold Council on June 5th presented a counter-narrative. The conventional view holds that higher policy rates suppress gold prices by pushing up real yields and strengthening the US dollar. However, historical data shows that US Treasury yields, the dollar, and gold have not followed a unified pattern following rate hikes.
The World Gold Council suggests that when a rate hike policy is actually implemented, it may, counterintuitively, benefit gold. Historical data indicates that during rate-hiking cycles, the probability of gold delivering positive, above-expectation returns exceeds 50%. Even after adjusting for the long-term average return (0.84%), the median gold return 21 days after a hike remains positive.
The Council identified several supportive factors for gold, including rising resource nationalism, persistent inflation pressures, worsening fiscal strains in the US and other economies, and increased risks of policy missteps due to greater divisions within the Federal Open Market Committee (FOMC), rising political pressure, and concerns about repeated errors.
The Council also noted that during rate-hike periods, the US dollar's influence on gold's direction often outweighs that of interest rates. Structural demand for gold from China, India, and central banks tends to be less sensitive to US interest rates, and central bank demand could continue to provide support for the metal.
The World Gold Council also issued a warning regarding the vulnerability of risk assets. For equity markets, interest rate hikes could be the proverbial straw that breaks the camel's back. In recent years, even small increases in long-term US Treasury yields have repeatedly disrupted short-term stock market rallies.
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