Quick overview
- Gold is currently trading at around $4,197, facing pressure from rising oil prices and expectations of a Fed rate hike.
- There is a 65% chance of a rate hike in October, which, along with high Treasury yields, is negatively impacting gold prices.
- Despite short-term challenges, strong structural demand from gold ETFs and central bank purchases may support prices in the long run.
- The next key support level for gold is $4,185, with a potential decline to $4,121 if this level is breached.
Gold is currently traded at around $4,197, as renewed strength in the oil market is raising concerns around inflation and keeping the spotlight on the Fed’s rate hike cycle. Currently, there is around a 65% chance of a rate hike in October in the markets. Furthermore, a high US Dollar and rising US Treasury yields are depressing the gold prices.
In the short term, gold prices are expected to come under pressure. Payouts in gold ETFs and central banks’ gold purchases add a floor to gold prices. However, from a technical viewpoint, the recent break below the $4,246 level opens the risk toward the $4,185 and then the $4,121 levels.
Oil Rebound Brings Inflation Risk Back
The recent rise in the oil prices, in particular due to the tensions around the Strait of Hormuz, increases concerns around inflation and pushes up gold prices.
However, from a longer-term perspective, rising oil prices support the case for higher Fed funds rates. As such, positive geopolitical events can actually benefit gold prices by increasing safe-haven demand, but can still negatively impact gold by supporting inflation and boosting the case for higher Fed funds rates.
October Fed Hike Odds Stay Elevated
Currently, the odds for a 50 bps rate hike in October stand at around 65%. Philadelphia Fed President Beth Hammack reiterated and supported the Fed’s view of a longer and larger rate hike cycle to bring down inflation, as she expects higher and elevated yields to be persistent for a longer period of time. As a result, and as long the case remains the same for other central bank’s policymakers, rallies in gold are expected to be short-lived.
Treasury Yields Remain a Major Headwind
Of all the obstacles facing the gold market in the current environment, a rise in Treasury yields is among the most important and Challenging. The opportunity cost of owning gold rises when the yield on the benchmark 10-year note increases. That opportunity cost rises even more when the dollar also strengthens. The data show that gold lost about 2.4% over the five weeks ended last week.
Structural Demand Is Still Strong
Although the markets are ignoring geopolitical risks, if U.S. interest rates remain elevated, the dollar will also remain strong. Gold was down nearly 2.4% last week, with five of the last six weeks showing a decline. Gold ETF Outflows Show Institutional Buying There is a disconnect between the short term movement of gold and longer term trends. In August, 137.5 metric tons of gold was flowed into ETFs, the second highest monthly total. This institutional buying will help offset the impact from a declining macroeconomic outlook.
Central Banks Continue to Accumulate
The longer-term trend for gold is upward. There are a number of long-term trends that support the purchase of gold, including continuing central bank buying. Central bank gold purchases for January through July totaled approximately 130 metric tons. If long-term expectations are for rising central bank purchases, gold prices will likely continue to move higher despite interest rate increases.
Middle East Risk Remains a Two-Sided Driver
Uncertainty in the Middle East persists and impacts the flow of global energy and commerce. Defensive sentiment for gold persists and may increase. Gold may continue to benefit from the ways that geopolitical risk is priced in this market. The escalation of the Ukraine conflict may price further increases in inflation and interest rates. This means that oil may continue to rise. The market expects that the Fed will continue to hike rates and that lower prices for gold may return.
Gold Technical Analysis: $4,185 Is the Next Key Test
Gold is currently trading at approximately $4,197. It recently broke below the $4,246 support level. From a briefly bearish perspective, the break below the support level was confirmed by a rejection of the descending trend line. Also, a series of lower highs was previously established. Given the above, I would consider $4,185 the next support level. A breakdown below $4,185 would likely lead to a test of the level $4,121. From a bearish viewpoint, the level $4,246 would be the first of a potential series of resistance levels.
The levels above $4,314 and $4,365 would come into play in the event of an even stronger upward move by the bulls. From a short-term perspective, the bond and equity markets are extremely oversold. The RSI is at approximately 29. Based on the RSI reading, I would expect some upside price movement from current gold prices.
Taking a bearish view on gold prices and expecting further downside movement may be prudent at these prices. I would view a break below $4,185 as confirming the next downside target at $4,121. A break above the $4,246 level would likely require a new analysis of the bearish view on gold prices and consider a break above the $4,314 level.
Frequently Asked Questions
Why is gold falling today?
Higher oil prices are reviving inflation concerns, which is keeping Fed-hike expectations, Treasury yields and the dollar elevated.
What is supporting gold longer term?
Record ETF holdings, continued central-bank buying and persistent geopolitical uncertainty remain the main structural supports.
What is the key XAU/USD support?
The immediate downside level is $4,185. A break below it would expose $4,121.
Arslan Ali Butt
Lead Markets Analyst – Multi-Asset (FX, Commodities, Crypto)
Arslan Ali Butt serves as the Lead Commodities and Indices Analyst, bringing a wealth of expertise to the field. With an MBA in Behavioral Finance and active progress towards a Ph.D., Arslan possesses a deep understanding of market dynamics.
His professional journey includes a significant role as a senior analyst at a leading brokerage firm, complementing his extensive experience as a market analyst and day trader. Adept in educating others, Arslan has a commendable track record as an instructor and public speaker.
His incisive analyses, particularly within the realms of cryptocurrency and forex markets, are showcased across esteemed financial publications such as ForexCrunch, InsideBitcoins, and EconomyWatch, solidifying his reputation in the financial community.
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