The past week has been one to forget for the gold bulls. The decline of some 4% this week markets the worst weekly close since June of last year. Gold prices have shed about $70 per ounce on the week, and more selling could be in store if the bulls do not stop the bleeding soon. Not only is the yellow metal being sold due to dollar strength and an increasingly aggressive Fed, but it also has to contend with recent technical damage inflicted that has taken the metal far below recent key support around the $1850 area. The technical breakdown may keep the bears encouraged and could lead to further selling before it has run its course.
The gold market may have also been victim to margin selling this week as equities were hammered. Gold is now in a consolidation stage and could test support at $1790 in the days ahead. A breakdown of $1790 could invite even more selling that could see the market decline towards the $1700 level. Traders may want to widen their volatility expectations, however, as markets across the board are likely to see continuing volatility due to the war in Ukraine, Chinese Covid lockdowns and other factors.
The days ahead may likely be primarily sideways for gold as it consolidates and possibly looks to recover. Any significant recovery, however, will need gold to retake the $1850 area on a closing basis. Given the market’s currently oversold status, gold could potentially see a rapid bounce higher, possibly even testing $1900 before petering out. Aggressive shorts may look to sell at a retest of $1900 and a significant battle between bulls and bears could be seen in that price area. For the time being, however, the bulls must work overtime to get the market stabilized.
Another factor in gold’s recent declines is the dollar. The currency has been stronger and recently hit a 20-year high. The dollar slipped a bit Friday but was still set to finish its sixth week of gains this week as worries over a slowdown persist. Higher interest rates and an aggressive Fed have stoked fears of a policy error that could not only put the U.S. into recession but could do so as inflation runs even hotter than recent weeks. Inflation data this week showed some signs inflation may be beginning to ebb, but any slowdown in price pressures is likely to be very slow. Concerns over inflation were likely to main factor behind the University of Michigan’s consumer sentiment survey falling to the lowest level since 2011. Worries over inflation, China lockdowns and Europe may keep inflows into the dollar going as investors seek out its perceived safety.
The necessary tightrope walking by the Fed will continue for months to come. As the central bank attempts to cool inflation while avoiding a recession, market volatility may see a further rise. This volatility may benefit gold in the end as investors seek out alternative asset classes.