Gold prices dropped below the key support level of $2,000 an ounce on Tuesday, reaching their lowest point this year. The stronger-than-expected U.S. inflation reading has increased the risk of potential changes to the Federal Reserve’s plans for interest-rate cuts.
Potential Shift in Market Sentiment
The significance of gold falling below $2,000 is twofold – both psychologically and in terms of technical trading perspectives. This drop marks a crucial support point that, if breached, could result in further sell-offs and a shift in market sentiment for gold.
Gold Futures Contracts
The most-active gold futures contract, April gold (GC00, -1.30% GCJ24, -1.30%), was down $25.20 or 1.2%, trading at $2,007.80 per ounce on Comex. It reached a low of $2,002.80 during intraday trading. The front-month February gold contract (GCG24, -1.30%) was down $26.20 or 1.3% at $1,992, also marking its low for the session.
Both contracts reached their lowest intraday levels this year, and if they settle below $2,000, it would be the lowest since December 13, according to Dow Jones Market Data.
Reasons for the Gold Price Weakness
The weakness in gold prices can be attributed to the release of “warmer-than-expected” consumer-price index data on Tuesday. This data indicates persisting inflationary pressure, which supports the case for continued or enhanced monetary policy tightness by Fed Chairman Jerome Powell and the Federal Reserve.
Higher-than-Expected Consumer Prices
Consumer prices saw a sharper-than-expected increase of 0.3% in January, surpassing economists’ forecast of a 0.2% rise according to The Wall Street Journal. The yearly inflation rate dropped to 3.1% from the previous month’s 3.4%, the first time it has been below 3% since March 2021.
Impact of U.S. Treasury Yields
U.S. Treasury yields also climbed higher in response to the inflation data, with 2-year yields (BX:TMUBMUSD02Y) surpassing 4.6%. This added pressure on gold prices, contributing to their decline.
In conclusion, gold prices have dipped below the key support level of $2,000 an ounce due to stronger-than-expected U.S. inflation data. This has raised concerns about potential changes in the Federal Reserve’s plans for interest-rate cuts. The drop in gold prices could lead to further sell-offs and a shift in market sentiment for the precious metal.
Gold Analysis: U.S. Dollar Strength Weighs on Prices
The U.S. dollar has strengthened, impacting the price of gold, as stated by experts in the field. The ICE U.S. Dollar Index DXY saw a 0.6% increase to 104.82 on Tuesday, which had a negative effect on dollar-denominated gold prices.
Impact of Interest Rates and Outlook
According to Kooijman, the improvement in the currency since the beginning of the year may continue if interest rates remain high. Hence, hopes for an interest rate cut in May have significantly declined and are now focused on June. The continuous presence of high interest rates can potentially affect gold’s prospects in the upcoming weeks.
Medium-Term Support and Other Factors
Nevertheless, gold could find some support over the medium term due to expectations of rate cuts later in the year. Furthermore, geopolitical developments and potential economic turmoil in other regions might attract investors towards gold as a safe haven asset.
Technical Resistance Level
From a technical trading viewpoint, it is crucial to keep an eye on the key resistance level at approximately $2,074, as highlighted by Koos. There have been multiple failed attempts to surpass this level since June 2020. The ongoing tug-of-war between bullish and bearish forces in the market is fueling concerns about how the next Federal Reserve meeting and CPI data might influence gold’s trajectory.
Prospects of a Breakout
Should gold surpass the significant resistance level of $2,074, it would be a monumental event for the precious metal heading into year-end, assuming it maintains its position. Koos emphasizes that once an investment reaches all-time highs, the only sellers remaining are those aiming to take profits. This type of selling usually does not have a substantial long-term bearish impact.
Long-Term Bullish Outlook
Koos predicts that as inflation cools, the Federal Reserve becomes more stable, and interest rates decrease, gold will eventually break through the iron ceiling represented by the $2,074 level. This breakthrough may prompt a shift in sentiment among former bears who might transform into bulls on the yellow metal. It is worth noting that most-active gold futures achieved a record settlement of $2,093.10 in late December.
Feel free to share your thoughts and analysis in the comments section!