Precious Metals look vulnerable in short-term
Precious Metals declined over 3% for the week as mixed news raises concerns about whether the emerging US recession would worsen or the dollar will regain strength as the Federal Reserve considers additional large rate hikes. The greenback’s rebound has weighed severely on gold, which was already suffering profit-taking after surpassing $1800.
Until last week, a four-week rally had given both gold futures on the New York COMEX and the physical price of bullion a gain of nearly $120, or 7%, from lows of approximately $1680 on July 21. On August 10, the yellow gold reached a high of over $1825 per ounce. The FOMC minutes, issued on Wednesday, showed that policymakers are still committed to increase interest rates to keep inflation under control. Furthermore, recent comments by various Fed officials suggested that the US central bank will continue to tighten policy.
Furthermore, better-than-expected US macroeconomic data reinforced markets, resulting in a further rise in US Treasury bond yields. In fact, the yield on the benchmark 10-year US government bond has returned to 3.0 percent territory. This, in turn, supports the greenback and leads to flows away from the non-yielding yellow metal, favouring bearish traders.
This occurred against the backdrop of easing inflation and other statistics indicating that the Fed may be done with large rate hikes, which sent the dollar lower. On the final day of the week, fears of a global economic slowdown spurred a new wave of the global risk-aversion trade. This is reflected in a generally weaker tone in the equities markets, which turns out to be a significant element supporting the safe-haven precious metal. However, an extension of the recent US dollar rise puts the attempted intraday recovery for dollar-denominated gold in check.
However, the tide has shifted this week, with improved weekly job numbers in the United States, as well as manufacturing and other indicators. For gold, the downward spiral has begun. The issue is, how much lower can it go? Surprisingly, both chart indications and fundamentals specialists’ opinions imply that it will not be much lower.
This is due to the inflationary dynamic associated with the better U.S. data that has emerged over the last week. After all is said and done, gold remains a hedge against inflation for some of the most serious investors, despite failing to live up to that billing since reaching record highs of more than $2,100 in August 2020.
Even from a technical standpoint, the recent string of failures at $1800 and subsequent drop below the previous monthly low, around $1754, lend validity to the bearish picture. As a result, the path of least resistance for gold appears to be to the downside. Nonetheless, the metal is on course to post hefty weekly losses, snapping a four-week gain streak, and reaching a one-month high.