On June 25th, the price of gold fell below the $4,000 per ounce threshold for the first time since last November, driven by a stronger U.S. dollar and heightened expectations for interest rate hikes. Silver prices also tumbled nearly 7% on Wednesday, dropping below $60 per ounce to reach a new low since December. During the Asian trading session today, precious metals showed relative stability following the sharp declines. Market attention now turns to the release of the U.S. PCE price index and revised GDP figures scheduled for tonight.
ATFX Chart
This week's significant sell-off in global technology stocks has also impacted gold. On the surface, tech stocks and gold represent risk assets and safe-haven assets respectively, with fundamentally different valuation logics. However, during large-scale cross-market sell-offs, the two become interconnected through "liquidity squeezes." The sharp correction in U.S. tech stocks stemmed from market concerns that the AI-driven rally had become overextended.
When positions in technology stocks incur losses, investors need to raise cash to meet margin calls or cover portfolio deficits. In such scenarios, gold, despite being considered a safe-haven asset, often becomes one of the first assets sold due to its high liquidity and ease of conversion to cash. Concurrently, the U.S. dollar index has continued its upward trajectory, reaching a new high on Wednesday not seen in over a year. A stronger dollar makes gold, priced in USD, more expensive for overseas buyers, further dampening demand for the precious metal.
Over the past three years, gold has achieved double-digit annual gains, more than doubling in price, primarily fueled by inflows from central banks, fund managers, and retail investors. The narratives supporting this bull run included the trend of "de-dollarization," a surge in central bank gold purchases, and investors buying assets like gold and Bitcoin to hedge against the depreciation risks of fiat currencies, such as the U.S. dollar, amid fiscal and monetary expansion.
However, this rally came to an abrupt halt in late January, after precious metal prices had reached a record high near $5,600 per ounce. By June, the gold price had fallen more than 20% from its previous peak. The outbreak of the U.S.-Iran war pushed energy prices higher and exacerbated inflation, leading markets to begin pricing in the possibility of interest rate increases. The "more hawkish-than-expected" signals released by Federal Reserve Chairman Wash at the June meeting alleviated market concerns about the independence of developed market central banks, making it difficult for demand for gold as a macro-policy hedge to recover as previously anticipated.
As the gold price declined, several major banks lowered their gold price forecasts last week. Although the adjusted target prices still imply potential upside from current levels, the optimism among Wall Street analysts is notably lower than before. Goldman Sachs Group cut its gold price forecast by $500, now expecting the price to reach $4,900 per ounce by year-end. Deutsche Bank lowered its fourth-quarter forecast by 17%.
Tonight's U.S. core PCE price index for May, the Federal Reserve's preferred inflation gauge, is viewed by the market as a key variable determining the short-term direction of gold prices. If the data shows persistent or accelerating inflation, it would directly reinforce Chairman Wash's hawkish stance, further boosting expectations for rate hikes. The U.S. dollar index could gain strong momentum, and gold, as a non-yielding asset, could face renewed selling pressure, potentially pushing the price below $4,000 and into even lower territory.
ATFX analysis suggests that if the inflation data does not exceed expectations, coupled with the fact that recent consecutive declines have largely digested negative news, gold may seek a technical rebound following the sharp drop. A return above the $4,000 level could attract follow-up short-term buying interest. It is worth noting that previous CPI and PPI data have already come in high, and non-farm payroll figures have remained robust, meaning the market has already priced in some expectation of inflation resurgence. It can be argued that gold's fall below $4,000 is the result of a confluence of factors: a strengthening U.S. dollar, rising interest rate hike expectations, and a liquidity squeeze stemming from tech stock sell-offs. This does not represent a permanent failure of gold's safe-haven attributes, but rather the outcome of capital repricing all assets in a high-interest-rate environment.
ATFX Disclaimer: The views, scenario analyses, and market judgments presented in this article are for reference and discussion purposes only and do not constitute any form of investment advice, trading recommendation, or endorsement of any financial product.
Comments