(Kitco News) - The gold market is testing initial resistance above $4,800 as easing geopolitical tensions and weaker-than-expected inflation are putting some pressure on the U.S. dollar; however, according to some market analysts, headwinds continue to pose a threat to the gold market.
In a note published Tuesday, Simon-Peter Massabni, Head of Business Development at XS.com, noted that the U.S. dollar index has fallen to a six-week low and is testing initial support at 98 points. He explained that the greenback is seeing renewed selling pressure due to growing expectations that the U.S. and Iran will reach a long-term peace deal, even as initial negotiations have struggled.
“This decline is not merely a temporary correction, but rather reflects a shift in market sentiment, as risk appetite improves alongside growing hopes for a relative easing of tensions between the United States and Iran. These dynamics are reducing demand for the dollar as a safe-haven asset,” he said in the note.
“I believe the Dollar Index is currently at a critical crossroads,” he said. “In the short term, I expect continued weakness or sideways movement with a bearish bias, driven by improved risk sentiment and reduced geopolitical concerns. However, in the medium term, the direction will largely depend on two key factors: the trajectory of U.S.-Iran relations and developments in U.S. monetary policy. If meaningful progress is achieved on the political front alongside weaker economic data, we could see a deeper decline in the dollar. Conversely, a resurgence in tensions or stronger-than-expected data could quickly restore some of the dollar’s strength.”
Although gold has benefited from renewed weakness in the U.S. dollar, Massabni added that it is not clear whether the yellow metal is ready to break out.
“Gold remains in a consolidation phase, caught between its role as a safe-haven asset and the pressures of a high-interest-rate environment and a strong dollar. While geopolitical risks continue to provide support, uncertainty surrounding monetary policy and the evolution of the U.S.-Iran conflict will remain key drivers of its short-term performance,” said Massabni.
Along with easing geopolitical tensions, gold and the U.S. dollar are also reacting to a potential shift in the Federal Reserve’s monetary policy stance. Since the start of the war in Iran, markets have quickly priced out potential rate cuts this year and have even begun pricing in potential rate hikes, as the conflict has created significant supply chain issues in the oil market, pushing energy prices higher and driving inflation fears.
While inflation has jumped significantly in the last month, it has not risen as much as expected. On Tuesday, the U.S. Labor Department’s Producer Price Index significantly surprised to the downside, with headline inflation rising only 0.5%, compared to consensus forecasts calling for a 1.1% increase.
In his latest note on gold, Carsten Fritsch, Commodity Analyst at Commerzbank, said that gold prices remain well supported as long as inflation expectations remain relatively contained.
“The downside potential for prices is limited by the fact that virtually no further Fed rate cuts are priced in until the end of the year. As long as the market does not begin to seriously consider a rate hike by the U.S. Federal Reserve — and there are no signs of this so far — the gold price is unlikely to fall much further,” he said.
Fritsch also noted that although gold prices continue to consolidate, investors are taking advantage of lower prices.
He pointed out that after seeing significant liquidations in March, investors are slowly starting to return to gold-backed exchange-traded funds. He said that global ETFs have seen their gold holdings increase by 25 tonnes since the start of April, compared to 85 tonnes of outflows in March.
Christopher Lewis, Market Analyst at FXEmpire.com, said that while he remains bullish on gold, as prices have held solid support above $4,600 an ounce, he also remains cautious. He added that just one negative comment during the peace talks could push prices down again.
“Good news will continue to drive rates lower, and it does look like we are starting to at least see the idea of good news coming out of the Middle East for once. That, of course, releases some tension in the market,” he said.
