(Kitco News) - Gold is struggling to hold support at $4,000 an ounce, which has become a critical pivot point for the precious metal. The disappointing price action comes as U.S. 10-year Treasury yields start the week below 5.0%, providing little relief for the beleaguered market.
Although gold continues to face significant macroeconomic headwinds, one market strategist says the recent selling pressure may be overdone, but any potential rally is expected to be only a period of consolidation rather than another significant move lower.
In an interview with Kitco News, Roukaya Ibrahim, chief commodities strategist at BCA Research, said that gold remains caught in a tug of war between bullish technical indicators and bearish economic fundamentals. She added that persistent inflation and the potential for a stronger U.S. dollar could prevent prices from generating meaningful bullish momentum through the end of the year.
"My technical indicators suggest that we're ripe for a rebound, but the macro variables suggest that there are still headwinds, so I'm inclined to think that we're probably going to move sideways in that environment," she said. "We're not really going to get a meaningful spike on the back of technicals. But also those technicals suggest that maybe we're also not going to see a further sell-off, even if we get those headwinds from the macro indicators."
Ibrahim explained that gold's deviation from its 200-day moving average has reached levels last seen in late July, when the precious metal established a short-term bottom before staging a significant recovery.
She said the technical indicator suggests that the recent selloff has become stretched to the downside, which could provide some support over the coming weeks.
However, Ibrahim cautioned that $4,000 remains a critical support level. A sustained break below that threshold could signal that further weakness is still to come.
Although technical indicators suggest that gold could be approaching a bottom, Ibrahim said the fundamental outlook remains challenging, particularly as persistent inflation pressures force the Federal Reserve to maintain a restrictive monetary policy stance.
She noted that gold's relationship with the U.S. dollar has become more important than its relationship with real interest rates in recent months. With the greenback expected to remain relatively strong through the end of the year, she sees limited scope for gold to generate a sustainable rally.
"I would be cautious on the outlook for gold prices. I'm not super bullish over the near term because of that risk," she said.
Ibrahim added that while U.S. Treasury yields have declined from their recent highs, lower yields alone may not be enough to support gold if the dollar remains strong and investors continue to focus on inflation risks.
She also noted that the ongoing conflict in the Middle East continues to complicate the outlook for monetary policy. Higher energy prices have intensified inflation pressures, making it more difficult for the Federal Reserve to consider easing interest rates.
"Over the near term, the risks are skewed to greater inflationary pressures," she said.
Ibrahim warned that the conflict could escalate further following the U.S. midterm elections, potentially adding to energy-driven inflation and reinforcing expectations that the Federal Reserve will need to maintain its tightening bias.
Despite these challenges, Ibrahim said the recent sharp decline in gold prices should not necessarily be interpreted as evidence of a fundamental deterioration in the precious metal's investment outlook.
She described last week's selling pressure as an unusual, potentially liquidity-driven event, noting that gold declined even as movements in the U.S. dollar and Treasury yields would normally have been supportive.
Rather than signaling a structural breakdown in gold's traditional relationship with financial markets, she suggested that the selling may have reflected broader cross-asset liquidity pressures.
Ibrahim also pointed out that gold had demonstrated considerable resilience in recent months, even as rising bond yields and a stronger dollar created increasingly difficult conditions for the non-yielding asset.
Looking beyond the immediate weakness, she said longer-term investment demand remains an important source of support for the precious metal.
Although central bank purchases are unlikely to accelerate significantly from their already elevated levels, Ibrahim expects official-sector demand to remain a supportive factor. She noted that China could continue to take advantage of lower prices to add to its gold reserves.
However, she said a more significant catalyst for another sustained rally could come from private investment demand, particularly if concerns about U.S. fiscal sustainability intensify.
Growing unease over government debt and fiscal deficits could encourage investors to increase their exposure to gold-backed exchange-traded funds and other investment products as a means of diversifying their portfolios.
For now, Ibrahim expects gold to remain caught between these longer-term supportive factors and the immediate challenges created by monetary policy and the U.S. dollar.
She said the macroeconomic environment could become more favorable for gold in early 2027, particularly if the dollar begins to weaken and inflation pressures eventually moderate.
