The gold market kicked off the holiday-shortened trading week on the wrong foot Tuesday as spot prices slid significantly. The spot gold market sold off sharply, and slid right through key support at the $1800 level. Prices are sitting in the $1766 area in later afternoon action and could be vulnerable to further selling pressure tomorrow and the days ahead. Now that the $1800 level has been breached by the bears, the next target will be $1750. Given Tuesday’s declines, the $1750 area is only a day or less away and could be breached in short order.
The gold market has some key issues working it against it currently. The declines in gold are being driven by rising treasury yields, dollar strength and an overall sense of “blah” that has hit markets in recent weeks. Although the long-term bullish case for gold may still be very well intact, the short-term case may be lacking. In the absence of any fresh bullish catalyst, the yellow metal may remain vulnerable to downside.
Treasury yields have eased a bit in recent weeks. The 10-Year Note yield is now sub-3% again in what could be another sign of inflation having already peaked. The dollar, however, hit a 20-year high overnight and has thus far not shown much, if any, signs of slowing down. A stronger dollar makes gold less appealing for foreign investors as it becomes relatively more expensive as the dollar ascends. The lack of foreign buying may keep gold under wraps for the time being and remains a major obstacle to a sustainable rally by the bulls.
Of course, the dollar’s recent ascension likely has a lot to do with rising interest rates and an aggressive Federal Reserve. If the Fed continues to raise rates as it has in recent months, the dollar could see further upside. Should the Fed pause or reverse course, however, the dollar could see a nasty reversal that could sink it significantly from current levels. A major dollar reversal could be just the fuel needed by the bulls to take the market higher on a sustainable path. Barring some dollar downside though, the path of least resistance remains lower.
A massive decline for crude oil did not do the gold market any favors on Tuesday. Oil dropped by over 8% on the session, shedding over $8 per barrel and closing below the key $100 level. Further declines for crude may weigh on gold further and could also lend credibility to the notion that inflation may have already peaked. Lower crude combined with lower yields could paint the unnerving picture of an economy headed into a period of stagflation.
For the time being, worries over inflation and the potential for a recession are likely to dominate the headlines and markets. Against this backdrop, gold may have to endure further selling pressure before finding enough support to mount a rally.