GOLD Analysis
Afternoon: Gold Prices Under Pressure Amid Dollar Strength and Market Shifts
Highlights:
- Dollar Rally Dampens Gold Demand: A strengthening dollar reduces the appeal of gold as a hedge, diverting investor interest to higher-yielding assets.
- Fed Rate Cut Expectations Moderate: Anticipated inflation could prompt the Fed to proceed cautiously with rate cuts, limiting gold’s upside potential.
- Trump’s Economic Policies Add Pressure: Pro-growth and inflationary policies encourage shifts toward risk assets, challenging safe-haven demand for gold.
Overview:
Gold prices dipped to $2,620 as the US dollar rallied, reflecting a broader shift in investor sentiment toward riskier assets in the wake of Donald Trump’s election victory. With the dollar strengthening, gold—a safe-haven asset—faces downward pressure as investors pivot to higher-growth investments like US equities and digital assets such as Bitcoin. The preference for these assets suggests that markets anticipate a pro-growth, inflationary economic environment under the new administration. The possibility of increased tariffs is expected to elevate inflation, further supporting the dollar and diminishing gold’s appeal as a hedge.
Market Impact of Trump’s Economic Policies Trump’s policies are expected to bring a mix of stimulus through potential infrastructure spending and tariff increases, both of which could lift inflation. Higher inflation traditionally strengthens the dollar, but it also means the Federal Reserve may limit its rate cuts to keep inflation under control. The Fed’s recent move to lower the federal funds rate by 25 basis points reflects ongoing concerns over the labor market and growth, yet markets are pricing in a reduced pace of cuts going forward. The current forecast indicates the Fed may reach an upper limit of 4% on the federal funds rate by Q4 of 2024, a tempered decline from prior expectations of a 3% terminal rate. These factors weigh on gold, as the anticipated inflationary boost reduces the likelihood of drastic rate cuts that typically support precious metals.
Investor Sentiment and Safe-Haven Shifts Investor sentiment has shifted away from safe assets like gold and Treasury bonds, partly due to expectations of a robust growth phase under Trump’s administration. This risk-on sentiment favors assets such as growth stocks and cryptocurrency, reducing the demand for traditional safety assets. Additionally, Trump’s policies may spark inflation, further boosting the dollar and creating headwinds for gold. Notably, SPDR Gold Trust, the world’s largest gold-backed ETF, reported a decline in holdings by 0.42% to 876.85 tonnes, indicating waning interest in the metal.
Key Data Releases and Fed Commentary Investors await a series of key economic data releases this week, including the German ZEW Economic Sentiment report, which will provide insights into Eurozone investor confidence, and remarks from FOMC member Christopher Waller. The ZEW Economic Sentiment figures may give an outlook on European economic resilience, while Waller’s comments could offer clues on how the Fed is balancing inflationary pressures against economic growth. Any sign of increased inflationary pressures or hawkish sentiments could further support the dollar, maintaining the pressure on gold prices.
Technical Analysis and Trading Strategy Gold’s technical support level sits at $2,590, with resistance around $2,650. On the MCX, gold prices have support at 74,900 INR and resistance at 75,800 INR.
Action: For traders, a recommended approach would be to sell on price jumps near $2,620, targeting a potential drop to $2,570. A prudent stop-loss level is set above $2,645 to mitigate potential upward volatility. This tactical approach aligns with the current trend as gold struggles to gain traction amid a strong dollar.
In summary, gold’s outlook remains tenuous as the combination of a robust dollar, expectations of inflationary policies, and a cautious Federal Reserve create a challenging environment for the precious metal. Investors should watch upcoming data and Fed communications closely, as they may provide further clarity on the trajectory of interest rates and inflation, which will likely shape gold's near-term movement.
Support and Resistance Levels:
