Gold prices fell near key support at $2,000 an ounce on Tuesday, touching their lowest intraday level of the year, as a stronger-than-expected US inflation reading raised the risk of changes in the Federal Reserve's plans to cut interest rates.
The significance of gold falling below $2,000 “lies from both a psychological and technical trading perspective, representing a critical support point that, if breached, could lead to further selling and a shift in market sentiment” for gold, said Adam Koss, head of Libertas. The wealth management group told MarketWatch.
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The most active gold futures contract fell $25.20, or 1.2%, to $2,007.80 an ounce on the COMEX after trading as low as $2,002.80. In low volume, the February gold contract GCG24,
The price of gold fell by $26.20, or 1.3%, to $1,992, which also represented its lowest level during the session.
Both contracts touched intraday lows so far this year, and settlements below $2,000 for the contracts would be the lowest since Dec. 13, according to Dow Jones Market Data.
Coss said the weakness in gold prices was primarily due to the “warmer than expected” CPI data released on Tuesday. “This indication of continued inflationary pressure supports the case for continued (or strengthened) monetary policy tightening [Fed Chairman Jerome] Powell and the Fed.
Consumer prices rose 0.3% more than expected in January. The index was expected to rise 0.2% by economists polled by The Wall Street Journal.
The annual rate of inflation fell to 3.1% from 3.4% in the previous month. It has not been less than 3% since March 2021.
Headline and core CPI numbers beat expectations as inflation remained “stubbornly higher than expected,” Bas Kooijman, CEO and asset manager of DHF Capital, said in an email comment.
He said US Treasury yields rose in response, with two-year bond yields BX:TMUBMUSD02Y exceeding 4.6%, adding pressure on gold prices.
The US dollar also strengthened, as the US dollar index DXY rose 0.6% to 104.82 in Tuesday trading, which affected dollar-denominated gold prices. The currency has improved since the beginning of the year and “could continue to do so if interest rates remain high,” Kooyman said.
He said: “Hopes for lowering interest rates in May declined significantly after the release of inflation data and have now shifted towards June.” “Higher interest rates for a longer period may weigh on gold’s outlook over the coming weeks.”
However, Kooyman said gold may find “some support in the medium term as markets continue to see interest rate cuts later this year.” Additionally, “potential geopolitical developments and economic issues in other regions could attract investors towards the asset.”
On the technical trading front, the key resistance level around $2,074 will be the key to watch, Koss said.
He said gold had been in a “massive, broad-based consolidation pattern since June 2020, with several failed attempts to break through” this key resistance level. “This tug of war between bullish and bearish forces continues as the market fears the upcoming Fed meeting and how the CPI data may cause… [the central bank] To answer.”
A break above $2,074 would be a “massive event for gold through the end of the year, assuming it can continue,” Kos said.
“When an investment of any kind hits all-time highs, the only sellers left are those looking to take profits — and those sellers don't typically impact investments in significant, long-term bearish ways,” he said. The most active gold futures contract reached a record settlement of $2,093.10 in late December.
“As inflation declines, the Fed calms, and interest rates fall, gold will eventually break through this iron ceiling [of $2,074] “When that happens, you can probably expect to hear people start to come out of the woodwork as previous bears turn into bulls on the yellow metal,” Koss said.
