Gold fell for the sixth week in a row and fell below $1700 for the first time in over a year. At the start of the week, safe-haven flows dominated the financial markets. Concerns about China enforcing lockdowns to stem the spread of the highly infectious BA.5 omicron sub-variant drove investors to seek refuge. Moreover, Europeans are dealing with something unthinkable just a few months ago: the euro approaching parity with the US dollar. This means that 1 EUR is equal to 1 USD. The euro last went below the dollar in November 2002.
This week, gold has wilted in the face of a higher US dollar, but it appears to be attempting to create a temporary foundation ahead of $1700. The dollar has retreated from recent 20-year highs, alleviating some of the pressure on demand for greenback-priced gold among foreign investors. Following the announcement of stronger-than-expected US CPI statistics, the probability of a 100 basis point FED rate hike increased. According to the CME Group’s FedWatch Tool, the probability of a 100 basis point rate hike in July has risen to more than 80% from 10% just a week ago.
Inflation has surged once more. It signals a more hawkish FED, which is negative for gold in the short run but positive in the long run. The June increase was the most significant monthly increase since September 2005. As a result, the US Dollar Index rose to its highest level in over two decades above 109, while gold fell to its lowest level since August 2021 at $1697.
Based on anecdotal information gathered by the Fed’s 12 reserve banks through July 13, the central bank’s Beige Book economic report showed that while economic activity “expanded at a modest pace, on balance, since mid-May,” several districts flagged signs of slowing demand, and “contacts in five districts noted concerns over an increased risk of a recession.” The new indicators of decreasing demand come as inflation remains unabated, with “significant price rises.” There were some encouraging indicators that inflation may be slowing, particularly for building inputs such as lumber and steel, which witnessed price decreases in three-quarters of the district.
Gold may struggle to make a dramatic move in either direction again next week. In the event that gold experiences a technical reversal next week, $1740 will serve as the first resistance level before $1760. If sellers manage to turn $1700 into resistance, further losses toward $1680 and $1670 might be seen.