Gold has started the week on the back foot, what is next?
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
Gold prices have started the week on the back, and the yellow metal has refused to break above the important resistance level of $2,000. The question for traders and investors is why the prices have started the week on the back foot and if this trend will continue for the rest of the week.
Gold prices are certainly in negative territory for the month, but well above the lows of the month, which we saw earlier this month. Traders and investors have been hoping that they will have another positive month for the gold price as the latest US inflation reading has shown a dramatic drop, and traders have been pricing that event as a possible weakness in the dollar index.
Today, Janet Yellen, the Treasury Secretary, also said that she is happy with the progress that has been made in relation to inflation and that things will only improve. However, if you look at the price action, the gold price is trading very much in negative territory.
Why is the gold price trading lower?
The reason that the gold price is trading lower is mainly because of one of its fundamentals, which is that it is classified as a risky asset. If we look at the US equity markets, we can see that there is a strong trend to the upside as risk on trade is back with vengeance. Since traders are feeling comfortable with their risk on trade, there is less interest in the gold price. It is true that last week there was an element of risk on trade, but at the same time we saw the gold price moving higher, but that was because we had a fresh reading of the US CPI reading indicating that the Fed will be less aggressive towards their monetary policy, which means less strength to the dollar index. But this week, on Monday, traders believe that the bigger bang for their buck is mainly in the riskier assets, and hence the equity markets are seeing more upticks and gold is lacking demand.
Can this change?
Well, the most important event for the week, in my opinion, is tomorrow's FOMC minutes and the language of the Fed. If we see more satisfaction in their language, we could see gold buyers coming back into the market. However, if there is some neutral tone, then we could a bit more move towards the downside. I do not expect the Fed to have an ultra-hawkish tone in their meeting, which means a significant drop in the gold price is not very much anticipated here.
The below chart shows the important price levels that traders should keep an eye on this week when it comes to the gold price.
Chart by online trading firm Exness