Amid concerns of a looming partial U.S. government shutdown and global economic turbulence, gold is not experiencing the usual safe-haven demand, primarily due to the strength of the U.S. dollar.
After returning to the $1,900 per ounce level on August 21, the spot price of gold, closely monitored by some traders, reached a one-month high of $1,953 on September 1, holding onto that support. However, the current situation suggests that this trend may be in jeopardy, with gold hovering just below $1,900 after briefly falling below this crucial support level.
The future direction of gold prices, whether they return to previous levels or decline further to the mid-$1,800 range or below, depends largely on the performance of the U.S. dollar.
As of the latest data, spot gold reached a session low of $1,896.61 as the resurgent dollar and rising Treasury yields exerted downward pressure on the precious metal.
Craig Erlam, an analyst at online trading platform OANDA, noted that a drop below $1,900 could be a bearish signal, potentially drawing attention to the August lows, which are not far away. However, there is also a possibility of further consolidation, as some support has been observed around the $1,900 level. In August, spot gold fell to as low as $1,884.35.
The surge in Treasury yields, benchmarked against the U.S. 10-year note, reached 16-year highs, with levels not seen since July 2007. Simultaneously, the Dollar Index reached highs last seen in November 2022.
Gold has faced renewed weakness this month due to the combined impact of rising Treasury yields and the strengthening U.S. dollar. The Federal Reserve’s recent projection of another quarter-percentage point rate increase by year-end, despite keeping rates unchanged in September, has further boosted the dollar.
Federal Reserve Chair Powell emphasized concerns about energy-driven inflation and stated the Fed‘s readiness to raise rates if necessary. The Fed had raised interest rates 11 times between February 2022 and July 2023, totaling a 5.25 percentage point increase from the previous base rate of 0.25%.
Economists are concerned that the Fed’s renewed hawkish stance could potentially dampen global economic growth, but some also acknowledge the need to control oil prices to achieve the Fed’s annual inflation target of 2%.
While the Dollar Index futures have maintained a strong uptrend, breaking above key resistance levels, it faces a significant challenge at the 107 level, which could act as a substantial barrier. However, the vertical rally in the dollar’s uptrend may lead to heightened fluctuations.
In terms of technical analysis, spot gold’s correctional wave has extended below the 50-week Exponential Moving Average (EMA) of $1,901, reaching $1,896. The next immediate support is at $1,888, with a potential decline to the descending wedge support line of $1,875 and a major downside target at the Monthly Middle Bollinger Band of $1,858.
In the event of a reversal, gold’s near-term resistance is seen at the $1,909-$1,913 range, which could serve as a turning point. Further strength above this zone could lead to a recovery towards the $1,929-$1,935 resistance zone.
