Gold is Down to Update New Highs

Gold prices declined by 2.5% to $2,355 per troy ounce this week, hitting their lowest level since May 15. This drop follows a sharp reversal after reaching an all-time high of $2,450 per ounce on Monday. The initial surge to record levels was driven by fears of potential Middle East conflict escalation after Iranian President Ebrahim Raisi died in a helicopter crash. However, these fears subsided when Iranian authorities attributed the crash to bad weather conditions. Gold closed Monday at $2,425 and remained close to this level on Tuesday.

By Wednesday, gold lost ground after the publication of the FOMC Minutes, which revealed a more hawkish stance from the Federal Reserve than the immediate post-meeting decisions had suggested. The Fed maintained interest rates but cut its quantitative tightening program further. Fed Chair Jerome Powell explicitly stated that no further interest rate hikes were planned. However, the Minutes indicated disappointment with Q1 2024 inflation slowdown and emphasized the need to maintain high interest rates until clear evidence of declining inflation appears. Hawkish Fed members are even open to another rate hike if inflation remains stubborn in May and June.

Despite this hawkish tone, the U.S. debt market largely ignored the FOMC Minutes, with 10-year government debt yields staying around 4.42% throughout the week. Bets on a Fed rate cut in September remained stable at 49.50-50.50%, according to the CME FedWatch Tool.

The SPDR Gold Trust (GLD) saw $504.9 million in net inflows last week, the largest since mid-March when $1.2 billion flowed into the fund. While large investors can be wrong, their March investments preceded a 13% rise in gold prices. Their current stake suggests expectations of a dovish Fed stance, with geopolitical tensions potentially pushing gold prices higher.

Weak macroeconomic data in the United States also support an upside scenario for gold, though technical analysis points to limited upside opportunities. Gold has already hit extreme upside targets at $2,400-2,500 per ounce, indicating that a bold correction might be necessary for prices to go higher. This scenario seems likely in the coming weeks, especially if prices dip below the support range of $2,290-2,310 per ounce. Upcoming U.S. GDP or PCE index data could help determine the next market move.