Gold is Holding to Its Highs on Interest Rates Cuts Expectations

Gold prices experienced a 1.7% increase this week, reaching $2379 per troy ounce, following a sudden spike to $2431, followed by a subsequent drop to $2333 per ounce last Friday. Currently, prices appear to be consolidating.

Investor sentiment was largely influenced by tensions in the Middle East, particularly as Iran launched over 300 missiles and drones towards Israel. Despite Israel's interception of the majority of these projectiles, concerns about the potential for a broader conflict persist among investors.

The SPDR Gold Trust (GLD) reported net capital inflows of $39.6 million last week, following two consecutive weeks of outflows totaling $637.0 million. Furthermore, investors deposited an additional $263.6 million into GLD during the first three days of this week. While it may be premature to expect a significant rally similar to that witnessed in early March, heightened geopolitical risks could provide support for gold prices in the near term.

On the macroeconomic front, U.S. 10-year Treasuries yields surged to 4.69%, the highest level since October 29, 2023, while the U.S. Dollar strengthened by 1.5%. These factors typically exert downward pressure on gold prices. However, a potential retracement in crude oil prices could serve as a counterbalance, as lower oil prices are often associated with disinflationary pressures that may prompt the Federal Reserve (Fed) to consider interest rate cuts.

Should oil prices continue to decline towards the $81.00-83.00 per barrel range for Brent crude, it is likely to contribute to a further decrease in Treasury yields, thereby supporting gold prices. Nevertheless, absent significant geopolitical escalation, gold prices may experience a correction to alleviate overbought conditions. The $2400-2500 per ounce range poses a strong resistance level, with potential retreats to $2200-2220. However, sporadic upside spikes driven by geopolitical turbulence cannot be ruled out, possibly leading to a retest of the all-time high at $2431 per ounce before any subsequent declines.