Dovish Fed Support for Gold May not Last Long

Gold prices experienced a 0.7% increase, reaching $2035 per troy ounce this week. Despite maintaining stability above the support level at $2010-2030 per ounce, there are indications of potential challenges ahead. Technically, gold prices seem to be facing resistance, and there is a possibility of a decline toward $1840 per ounce to close the gap that occurred on October 9, 2023. The Federal Reserve's (Fed) dovish monetary forecasts interrupted this scenario.

The gold seem to be a very tired person that hasn’t slept for three days in a row. He is trying to fall asleep all day, but every time somebody keeps it awake. So, he is on his feet, but eventually tries to lie down on any horizontal surface nearby. This idea could be justified by two major factors. First, three Fed official have made their hawkish statements just few day after the meeting. . New York Fed President John Williams, Atlanta Fed Chief Rafael Bostic and Chicago Fed’s President Austan Goolsbee said that its’s too early to say about interest rates cuts. This may sound conflicting to what Chair Jerome Powell has said right after the Fed meeting, but only at the first glance.

Large investors have been selling shares of SPDR Gold Trust (GLD) for four out of the last five weeks, with net selloffs totaling $251 million during this period. Weekly selloffs have accelerated, reaching $131 million.

Former FDIC Chair Sheila Bair has made a brilliant qualification for Powell’s rhetoric suggesting that he was irresponsibly dovish. “There’s a long way to go on this fight [with inflation]. I do worry they’re [the Fed] blinking a bit and now trying to pivot and worry about recession, when I don’t see any of that risk in the data so far,” she said.

Who will be right and who’s wrong will be clear quite soon. From a short-term perspective, uncertainties persist, with the potential for the Fed to restore a hawkish policy or, alternatively, economic concerns leading to a recession. Both scenarios may have negative implications for gold in the mid-term. If gold prices fall below $2010 per ounce, they could continue to decline toward $1840 per ounce, aligning with the scenario of closing the October 9 gap.