Gold is Crawling Down

Gold prices faced a decline of 1.2% to $2309 per troy ounce over the course of this week, with a sharper drop of 2.4% observed on May 1, bringing prices down to $2281 per ounce. However, prices rebounded following the Federal Reserve (Fed) meeting held on Wednesday.

Investors had been eagerly anticipating the Fed's decisions amidst the backdrop of accelerated inflation in February and March. It was widely expected that policymakers would adopt a hawkish stance in response. However, the Fed surprisingly opted for a dovish approach. They announced a reduction in the Treasury runoff from its balance sheet, cutting it to $25 billion from $60 billion starting June 1. This move signifies a slower pace of quantitative tightening than initially anticipated. This decision appeared to contradict previous statements from Fed Chair Jerome Powell regarding persistently high inflation levels, which have consistently exceeded expectations. Recent data indicated that inflation is running at 3.5% YoY, significantly surpassing the 2.0% target.

Market reaction to the Fed's decision was subdued, with U.S. 10-year Treasuries yields decreasing marginally to 4.61% from 4.64%. Bets on interest rate cuts by the Fed remained largely unchanged, with probabilities at 11.7% in June, 27.6% in July, and 43.3% in September, according to the CME FedWatch Tool.

One plausible explanation for the Fed's dovish stance could be their reluctance to take more aggressive actions to curb inflation ahead of the U.S. presidential elections scheduled for November. However, such contradictory signals from the Fed may exacerbate the risk of inflationary pressures by injecting more liquidity into the financial markets, potentially leading to higher debt market yields and worsening financial conditions. This could subsequently trigger a correction in the stock market and strengthen the U.S. Dollar, consequently driving gold prices down.

Meanwhile, oil prices are on a downward trajectory, with Brent crude prices declining by 5.0% to $84.10 per barrel this week. This downward trend in oil prices could alleviate inflationary pressures. However, if oil prices continue to slide below the $80.00-82.00 per barrel range, it could negatively impact stock indexes. This potential scenario might influence the Fed's decision-making process, as they aim to convey dovish intentions without resorting to interest rate cuts. Investors are also contemplating the possibility of a stock market correction in May and June.

Gold prices are currently grappling with overbought conditions, which are exerting downward pressure. The ongoing correction may be prolonged if prices breach the support level at $2290-2310 per ounce, with the next downside target situated at $1960-2000. The SPDR Gold Trust (GLD) reported net capital inflows of only $22.4 million during the last week, compared to $397.0 million in the previous week, indicating a waning upside momentum for gold.

The forthcoming U.S. labor market report for April, set to be released this Friday, will serve as another pivotal event for the bullion. A continuation of strong labor market conditions could potentially drive gold prices below the support level at $2290-2310 per ounce.