So long as gold prices continue to wrestle with the hostile market backdrop, they will be susceptible to extended selloff. As it stands, Gold’s price has just dropped under the 21-day Simple Moving Average (SMA) of $3,313. This positioning means that sellers are almost certainly going to maintain the upper hand in the market. Analysts caution that gold needs to move decisively above this crucial resistance level. If it proves wrong on that, the picture only gets more dire.
The market dynamics are very much driven by a confluence of economic re-opening and taping in overseas as well as geopolitical untangling. The U.S. Federal Reserve’s recent adjustments to interest rate expectations have played a significant role in shaping gold’s trajectory. Prices are facing some formidable headwinds at the moment. The next important support level to keep an eye on is $3,100 and then the April 10 low of $3,072.
Economic Indicators Impacting Gold Prices
The CPI data released on Wednesday, August 10 have further complicated and clouded the gold market landscape. The Bureau of Labor Statistics (BLS) just released the CPI data. It showed that in July inflation rose just 0.2% over the prior month, which was lower than the anticipated 0.3% increase. This divergence is notable considering prevailing inflationary pressures that traditionally underpin gold prices as an effective hedge against currency devaluation.
On a year-over-year basis, U.S. CPI increased by 2.3%, slightly missing estimates of 2.4%. Together, these figures paint a picture of stubbornly persistent inflation. It’s possible that growth isn’t boosting as fast as we thought, pushing the need for rate cuts to be reconsidered. Markets are now pricing in only 50 bps of cuts total for this year. In terms of future cuts, they currently view 50% odds of a 25 bps cut in September.
Curiously, even as market participants attempt to digest all of this economic data, gold prices are currently undergoing a corrective drop. The 14-day Relative Strength Index (RSI) is now at 48.50. This index indicates that recent momentum is weakening, suggesting a larger downward trend may be forthcoming.
Geopolitical Factors and Central Bank Actions
Building upon affirmative economic indicators is a fundamental shift in the geopolitical landscape supporting gold. After last week’s U.S.-China trade truce announcement, expectation from many on a near-future trade deal have already resulted in increased market volatility. Consequently, gold has begun to give back much of its bounce from last week’s low.
Central banks have been a prominent driver of the gold market. In 2022, they deepened their rainy day funds by over $145 billion. They have, in total, purchased 1,136 tonnes of gold worth about $70 billion. While the West continues to hoard digitized money, emerging economies including China, India and Turkey are increasing their gold reserves. This robust appetite might lift gold prices in the broader market.
Now, optimism for tangible breakthroughs in the increasingly tenuous Russia Ukraine peace process is deflating the atmosphere for gold. These negotiations are scheduled for this Thursday to continue. This level of optimism has the potential to reduce demand for gold as a safe-haven asset, which will only serve to further pressure prices.
Future Outlook for Gold Prices
In order for gold prices to recover sustainably, the bulls will need to reclaim the 21-day SMA at $3,313. However, if this resistance level is broken, analysts expect a test of the descending trendline resistance at $3,430. So stay tuned to see which way the market will turn! Absent this upward thrust, though, gold should face continued headwinds.
The interplay between stabilizing U.S. dollar values and diminishing expectations for interest rate cuts will continue to shape gold’s performance in the coming weeks. As traders assess these factors alongside geopolitical developments, they will closely monitor any shifts in market sentiment that could affect their positions.