(Kitco News) - After gold held critical support at $4,000 and gapped higher at the start of the week, fortunes have once again shifted in the gold market as prices look to end the shortened trading week back where they were last Friday.
U.S. markets will be closed Friday in recognition of the Juneteenth holiday.
For some investors, the holiday can't come fast enough after the gold market took a significant hit late Wednesday when the Federal Reserve's updated economic projections showed support for a potential rate hike by the end of the year.
The central bank's outlook dramatically shifted from March, when the committee was looking to cut interest rates. At the same time, new Federal Reserve Chair Kevin Warsh reaffirmed the central bank's hawkish shift as he emphasized his focus on price stability.
"The way to get monetary policy right is to deliver on the remit that Congress gave us to deliver on price stability," he said.
Warsh's comments, coupled with the central bank's expectations, put renewed pressure on gold as the market gave up nearly all of its gains from the start of the week. Spot gold last traded at $4,230.70 an ounce, up only a few dollars from last week's closing price.
Ole Hansen, Head of Commodity Strategy at Saxo Bank, said that following gold's selloff, the market is now caught in limbo.
"Sentiment is unlikely to improve materially until the price action itself improves, and in that respect, the 200-day moving average remains the key battleground. Gold currently trades roughly USD 200 below that level, leaving trend followers reluctant to re-engage on the long side," he said.
Hansen added that at the very least, gold prices need to continue to hold support above $4,000 an ounce.
"A successful defense of that area would maintain the view that the recent sell-off represents a relatively shallow - albeit painful - correction within the powerful bull market that began from the 2022 low near USD 1,615 and culminated in the January record high at USD 5,595," he said.
Analysts note that the Federal Reserve's hawkish bias has overshadowed the shift in geopolitical uncertainty as the Trump administration prepares to sign a new peace agreement with Iran, ending the months-long war.
Although a resolution of the conflict will reopen the Strait of Hormuz, ending the energy supply disruptions, some analysts have said that it will take some time to determine how much damage has been done to the energy infrastructure and the global economy. Analysts note that oil prices could remain elevated as nations will have to rebuild strategic reserves; this environment will continue to keep inflation fears elevated and force the Federal Reserve and other central banks to maintain hawkish biases for the foreseeable future.
Simon-Peter Massabni, Head of Business Development at XS.com, said in a note that gold is now caught between a hawkish Fed and easing geopolitical tensions, creating short-term volatility.
"Gold is entering a period characterized more by elevated volatility than by a clearly defined trend. On one side, the market faces headwinds from a stronger dollar, hawkish Federal Reserve policy, and rising U.S. Treasury yields. On the other hand, persistent inflation, global economic uncertainty, and the possibility of renewed geopolitical tensions continue to provide underlying support," he said. "Over the medium term, I continue to view any further weakness in gold prices as a potential strategic buying opportunity rather than the beginning of a sustained decline.
"Despite the recent decline, I do not believe the long-term bullish trend for gold has come to an end. Financial markets often overreact to short-term developments, while structural fundamentals ultimately determine longer-term trends. Inflation remains above central bank targets, central banks around the world continue to increase their gold reserves, and U.S. government debt continues to expand at an unprecedented pace," he added.
David Morrison, Senior Market Analyst at Trade Nation, said that as volatility increases, he sees more downside risks for gold.
"It's difficult to know where [prices] go next, particularly with the US dollar on such a tear. But, as things stand, it looks as if a hawkish Fed may weigh on prices more than a US/Iran peace deal may offer support," he said.
Along with ongoing geopolitical uncertainty, economic data will create further volatility in the gold market. The key event next week is the final reading of first-quarter GDP and the Personal Consumption Expenditures Index. Analysts have said that markets will continue to be sensitive to inflation data, especially after the Federal Reserve has revealed its new hawkish bias.
Investors will also be paying attention to S&P Global's preliminary manufacturing and services PMI data to see how well the economy is holding up in the face of rising inflation.
Despite short-term downside risks, commodity analysts continue to see current gold prices as a buying opportunity. On Tuesday, Sameer Samana, Head of Global Equities and Real Assets Strategy at Wells Fargo, said that even if prices were to drop below $4,000, he sees limited downside; at the same time, he added that investors can't ignore the precious metal's long-term potential.
"For gold to not do well, you would need countries around the world to rein in their deficits and defend price stability," he said.
Economic data to watch next week:
Tuesday: S&P Global Flash PMI
Wednesday: US New Home Sales
Thursday: Final US Q1 GDP, PCE, weekly jobless claims, Durable Goods Orders
Friday: Revised University of Michigan Consumer Sentiment
