Trade Of The Week: More Pain Ahead For Gold?

The past few weeks have been rough for gold.

After securing a solid weekly close below the $1825 level back in late June, bears were injected with fresh inspiration as various fundamental forces fuelled the downside momentum. The precious metal is down almost 4% this month with prices trading at levels not seen since September 2021!

Last Friday’s blowout US jobs numbers compounded gold’s woes as expectations solidified over a 75-basis point rate hike at the Fed’s July meeting. The US economy added 372,000 jobs in June, an indicator of resilience in the labour force despite signs of slowing economic growth while the unemployment rate held steady at 3.6%.

With the dollar hitting new multi-decade highs and Treasury yields rebounding amid expectations of more aggressive rate hikes by the Fed, gold could find itself depressed and unloved.

The week ahead could be volatile for gold thanks to key economic data and risk events. Looking at the technical picture, bears are clearly in a position of power on the H4 and daily timeframe with prices shaking above $1735 as of writing. Given how the fundamentals are weighing heavily on the precious metal, bulls could find it difficult to fight back in the short to medium term.

Before we cover what to expect from gold in the week ahead, it is worth keeping in mind that the precious metal took a real beating last week, cutting through multiple levels of support like a hot knife through butter. Gold is down roughly 5% year-to-date and approaching key support at $1700.

Given how the 10-year Treasury yield is back on the rise amid aggressive rate hike bets, gold may struggle to shine. The precious metal offers no yield, making it less attractive for investors to own in an environment of rising Treasury yields.

All eyes on US Inflation data

Wednesday sees the release of the US inflation report with investors watching anxiously to see if prices are rising again or perhaps that we are finally peaking. According to a poll by Bloomberg, inflation is expected to rise 8.8% year-on-year in June compared with 8.6% in May. If expectations meet reality, this would mark the fastest increase in consumer prices since the 8.9% figure back in December 1981! Such a development will most likely reinforce market bets of more aggressive Fed rate hikes – ultimately smothering investor appetite for gold as the dollar and Treasury yields rise.

Other than the US inflation report, gold could be influenced by ongoing geopolitical risks and recession fears. However, the precious metal remains highly sensitive and reactive to the dollar and Treasury yields. 

Gold ETFs favour bears

According to an automated report from Bloomberg, gold ETFs cut 98,220 troy ounces of gold from their holdings last Friday, bringing this year’s net purchase to 5.26 million ounces. This was the eighth straight day of declines and the longest losing streak since May 18.

The outflows could be based on the strong US jobs report which reinforced bets over the Fed raising rates aggressively. A gold ETF provides investors exposure to gold without owning it physically. In this instance, outflows from ETFs are seen as bearish for the underlying asset.

Is Gold in trouble?

Gold remains under pressure on the daily, weekly, and monthly charts with prices approaching critical support at $1700. Over the past few weeks, the precious metal has been battered by a stronger dollar and Fed rate hike bets. Prices are heavily bearish with a strong breakdown below $1700 potentially opening doors to levels not seen since June 2020 below $1675.

On the daily charts, key levels of interest can be found at $1724, $1680, and $1660.

Zooming out to the weekly, it’s all about $1770, $1700, and $1680.

Focusing on the monthly charts, prices remain in a wide range with support around $1700 and resistance at $2000. It may be wise to keep a close eye on how the $1700 support level fares.

Gold Federal Reserve Treasury yields Dollar CPI