Gold May Drop Beneath $2000

Gold prices have experienced a 0.5% decline to $2034 per troy ounce since the beginning of the week, with a more significant drop of 1.40% observed on Monday, reaching $2016 per ounce. The cautious approach of investors, avoiding unnecessary risks, is cited as a contributing factor. A key level to watch is $2010 per ounce; falling below this level could trigger a 4.5% further drop towards $1920, potentially canceling the uptrend that began on October 6 of the previous year.

The robust U.S. labor market report for December, released on the previous Friday, surprised markets positively. All three major components—unemployment rate, average hourly earnings, and nonfarm payrolls—beat consensus expectations. The unemployment rate remained at 3.7% (versus an expected 3.8%), average hourly earnings rose to 0.4% MoM (compared to an expected 0.3%), and nonfarm payrolls reached 216,000, surpassing the anticipated 170,000.

In response to the strong labor market report, borrowing costs in the United States increased, with the U.S. 10-year Treasuries yields rising to 4.10% from 3.88% the previous week. Yields are currently consolidating at 4.00%. Expectations for Federal Reserve (Fed) interest rate cuts in March also shifted, with bets on a 0.25% cut dropping to 62.7% on Tuesday from 73.4% at the beginning of January, according to the CME FedWatch Tool. Although these expectations recovered slightly to 69%, the sentiment has changed.

Fed officials sought to manage expectations, emphasizing a commitment to maintaining higher interest rates for a more extended period to address inflation concerns. The strong labor market, preventing a further slowdown in inflation, is considered unfavorable for gold prices. SPDR Gold Trust (GLD) witnessed significant capital outflows of $628 million during the last week, a trend not seen since October 2022. However, further confirmation of this trend is needed, especially after a stable close to zero balance during the previous six weeks.

The technical outlook for gold prices remains uncertain. There are downside possibilities for the next few weeks, particularly if prices fall below $2010 per ounce. On the other hand, if the support at $2010-2030 remains intact, prices may continue their upward trajectory towards $2100 per ounce.