Gold prices have seen a significant pullback below $3,400 as markets await the next Federal Reserve meeting. Having recently touched two-week highs of $3,435, the precious metal came under heavy selling pressure in the wee hours of Wednesday morning. The move occurs as optimism over US-China trade talks has curbed safe-haven demand for gold. Analysts predict that the unfolding developments could further extend gold’s correction in the days leading up to the Fed’s decision.
Investors have been hanging on the Federal Reserve’s policy pronouncements with extreme interest. At the same time, gold prices are wrestling with a mixed bag of economic indicators. Look too for a change in Fed Chair Jerome Powell’s tone during the press conference. It would undermine market expectations for aggressive interest rate cuts later this year, if not sooner.
Current Gold Price Trends
Gold’s recent price action is part of a larger theme of correction after achieving two-week highs. The drop under $3,400 represents an important test for gold bulls, who are currently in search of support. The 21-day Simple Moving Average (SMA) at $3,283 serves as the next line of defense for gold buyers. If prices continue to decline, they could reach that May 2 bottom of $3,223. This would be a sign of an even more powerful bearish move to come.
If gold prices can take a firm hold above $3,435, they will be on course to reach the next resistance. That resistance lies close to $3,494 in the channel. Cautious tone in market continues. Traders are taking profits before the Fed meeting — complicating their decision — which only makes their decision trickier.
Analysts note that the 14-day RSI remains comfortably south of the midline at around 61.50. This means that any pullbacks in gold bullion prices will be quickly met with eager buyers. Throughout these technical indicators, we can see that traders are still bullish on gold being able to rebound.
Impact of US-China Trade Talks
The latest round of US-China trade talks, scheduled from May 9 to 12, helped energize the market. Consequently, gold prices fell sharply over the past few weeks. Coupled with ongoing optimism over these negotiations, this has dampened gold’s appeal as a safe-haven asset. First, fears of a trade war between the world’s two largest economies have all but disappeared. As a consequence, investors have turned to riskier assets.
The stakes in this round of talks are enormous. A more positive economic outlook would reduce the growth prospects in both countries, making gold less attractive. If negotiations falter, heightened demand for gold may return as investors again look for safe haven from expected economic turmoil.
The US Dollar has regained strength as fears for rising economic growth have subsided. This increase in the dollar’s strength has exerted even more deflationary pressure on gold prices. Typically, as the dollar strengthens, demand for non-yielding assets such as gold tends to decrease, causing a price correction.
Federal Reserve Influence on Gold Prices
Federal Reserve policy is one of the most important drivers on gold prices. Market participants are especially looking forward to gleaning clues from Powell’s much talked about upcoming press conference. His comments would change the outlook for interest rate cuts later this year, creating the direct effect of shaking up market dynamics.
Gold prices have a long-established track record of responding favorably when interest rates increase. Rising rates would typically weigh on gold, as higher real rates increase the opportunity cost of holding non-yielding assets. As a result, even the slightest signals of a dovish turn in the Fed’s policy course could supercharge gold bulls in retaking much loftier price levels.
Traders will have to keep a very close eye on economic data ahead of the meeting. They will be prepared to act quickly should there be any surprise move toward tighter monetary policy. Inflation and employment figures are the key metrics that drive Fed decisions. Consequently, gold bulls remain on constant lookout for a story that will turn sentiment.