(Kitco News) - Despite easing inflation pressures, gold is ending the week with another loss as it tries to hold support at $4,000 an ounce. Analysts note that the precious metal remains vulnerable to further downside pressure as escalating military action in the Middle East once again disrupts the global energy market, stoking inflation fears.
Spot gold last traded at $4,017.30 an ounce, down 2.5% on the week.
This past week, June CPI data showed a sharp slowdown in consumer price growth, helping ease concerns that the war in Iran was having a lasting impact on inflation. However, analysts noted that the relief may be short-lived, as oil prices have climbed back above $80 a barrel while geopolitical tensions continue to intensify.
Chris Gaffney, President of World Markets at EverBank, noted that gold prices have dropped below $4,000 an ounce four times in the last four weeks, but broader support has held so far.
“The $4,000 price level is a major psychological price point for individual investors and if it breaches this level and continues to fall, we could see gold go into a deep short-term correction,” he said. “The key data is going to be the US inflation numbers – if we don’t see a larger spike in oil prices, then the US inflation numbers should continue to show improvement. This would decrease expectations for a US interest rate increase, which would definitely help gold prices.”
Analysts have said that while gold’s nearly 30% correction from its January all-time high has already priced in a significant amount of bad news, persistent uncertainty could lead to further downside.
“In the short term, the main risks are higher bond yields, a stronger dollar and reduced expectations for interest-rate cuts,” said Waleed Said, technical analyst at GivTrade. “A large amount of negative news is already reflected in the price, but the market has not fully priced in a prolonged inflation shock or further tightening from the Federal Reserve.”
However, Said added that despite the downside risks, gold’s long-term potential remains firmly intact.
“This is still a correction, not yet a breakdown in gold’s longer-term trend,” he said.
Neil Welsh, Head of Metals at Britannia Global Markets, said that gold’s fortunes are currently closely tied to oil prices.
“If energy prices sustain their climb, the resulting inflationary pressure may force the Fed to maintain a higher-for-longer rate environment,” he said. “To break the current bearish spiral, the market would likely require either a meaningful shift in US economic data that offsets inflation concerns or a clearer signal that central banks are nearing the end of their tightening cycle.”
With markets pricing in a potential rate hike as early as September, Lukman Otunuga, Senior Market Analyst at FXTM, said in the short term, the path of least resistance for gold remains lower.
“With the Strait of Hormuz closed again, the threat of a renewed supply crunch has stoked inflation fears, lifting the dollar and Treasury yields,” he said. “Given how traders are pricing a 56% chance of a Fed rate hike by September, this may limit any potential upside. A stronger dollar and higher yields are likely to make zero-yielding gold increasingly less attractive. $4,000 is the line in the sand, with a clean break below opening the door toward $3,950 and $3,900. If that level holds, $4,100 comes back into view.”
Despite the downside risks, Simon-Peter Massabni, Head of Business Development at XS.com, said that much of the negative news has already been priced into the market. He added that even if support at $4,000 fails, he sees limited downside.
“I believe the market may have already priced in an overly negative short-term scenario. Gold continues to benefit from important structural drivers, most notably ongoing purchases by global central banks, elevated geopolitical uncertainty, and the growing need for protection against sovereign risks and long-term inflation. Therefore, the key question is not whether gold’s bullish trend has ended, but rather how much of the current negative news has already been absorbed by the market,” he said. “In my view, the $3,950–$3,940 zone represents a strategic support area that could provide a foundation for rebuilding buying positions if markets begin to recognize that the impact of geopolitical tensions on global growth may eventually outweigh their inflationary impact.”
Even if $4,000 continues to hold as support, analysts said the market needs a clear signal from central banks that interest rates are not going to move higher despite sticky inflation.
“Any signs of a slowdown in the U.S. economy or a moderation in energy-driven inflation pressures could quickly push markets back toward pricing in interest rate cuts, providing gold with renewed fundamental support. From a technical perspective, gold appears to be in an accumulation phase, positioning itself for a potential return to the upside with strong conviction,” said Massabni.
With an extremely light week for economic data ahead, analysts said markets will be particularly sensitive to geopolitical headlines as the war in Iran shows no sign of ending. The key economic event next week will be the European Central Bank's monetary policy meeting.
Economists expect the ECB to leave interest rates unchanged, although a September rate hike is expected to remain on the table.
“After hiking in June, we expect the ECB to leave policy on hold,” said fixed-income analysts at TD Securities. “A September hike is likely to be left on the table in the press conference, but with little concrete guidance.”
Economic data to watch next week:
Thursday: ECB monetary policy decision, US weekly jobless claims
Friday: S&P Global Flash PMI, US New Home Sales
