Gold price has weakened from $1879 to $1614 since June 13, 2022, and the current price stands at $1656. Gold is considered a safe-haven asset, but it is important to say that a safe-haven demand driven by concerns over Ukraine is countered by the strength of the US dollar.
The demand for the dollar continues to grow as the Federal Reserve continues to hike rates in an effort to stem soaring inflation. Higher US interest rates increase the opportunity cost of holding the zero-yielding metal, and the upside potential for Gold remains limited for now.
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Inflation numbers in the US suggest that the Fed needs to be more aggressive and Fed Chair Jerome Powell said that US central bank officials are strongly resolved to bring down inflation from the highest levels in four decades and will keep at it until the job is done.
Investors usually buy Gold to hedge against inflation, but currently, we have a different practice, and the focus remains on the dollar.
The aggressive monetary policy from the US Central bank positively influenced the US dollar in the period of the last several months, and the most significant force behind the Gold price slide is the appreciation of the US dollar. Saxo Bank warned its clients:
Hawkish Fed comments and no signs of economic data showing the much-needed slowdown have seen the market price in a Fed funds rate above 5% by early next year. Gold will likely continue to struggle until we reach peak hawkishness and/or the dollar starts to weaken.
On the other side, if the US Federal Reserve continues to act too aggressively, this could potentially move the economy toward a deep recession. As a result, we could see a move towards safe-haven assets, and the price of Gold would benefit if this happens.
Bears still control the price action
Those whose interest is to invest in commodities like Gold should consider that the risk of further decline is still not over.
The appreciation of the US dollar in the last several months had a negative influence on Gold, and the price of this precious metal would not make any significant jump until the Fed shifts its policy from hawkish and goes back to monetary easing.
The important support level stands at $1600, and if the price falls below this support, it would be a firm “sell” signal. The next price target could be around $1550 or even below.
On the other side, if the price jumps above $1750, it would be a signal to trade Gold, and we have an open way to resistance at $1800.
Summary
The aggressive monetary policy from the US Central bank positively influenced the US dollar in the period of the last several months, and the most significant force behind the Gold price slide is the appreciation of the US dollar. For now, bears remain in control of the price action, the important support level stands at $1600, and if the price falls below this level, it could be the beginning of an even bigger sell-off.
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