July 19, 2024

Gold Prices Test Support Levels: What’s Next for the Precious Metal?

Gold futures recently experienced a notable two-session slump, decreasing by about 3%, marking the largest such drop in over a year. This downtrend in gold prices prompts speculation on whether this adjustment has set the stage for new investors to benefit as prices potentially surge to unprecedented highs.

The decline in gold’s appeal is attributed in part to a reduced risk of conflict between Israel and Iran, according to Fawad Razaqzada, a market analyst at City Index and FOREX.com. As geopolitical tensions ease, the urgency to invest in gold as a safe haven diminishes slightly. On Tuesday, the most actively traded June delivery futures contract for gold (GC00, GCM24) dipped to $2,342.10 an ounce on the Comex, marking its lowest closure since April 4. The day before, prices had already dropped by $67.40 to $2,346.40, culminating in a 2.97% decline over two days, which is the sharpest since early February.

Analysts ponder if this recent price correction—seen by some as a much-needed reset from ‘overbought’ conditions—might pave the way for a rebound to new highs. Razaqzada had anticipated this pullback, suggesting that the surge in gold prices was ripe for a correction. He also noted concerns about the sell-off in the bond markets, which propelled Treasury yields higher, thereby increasing the cost of holding non-yielding assets like gold.

The yield on the 10-year Treasury (BX:TMUBMUSD10Y) has risen significantly, up 8.9% for the month and 17.9% year-to-date, reflecting heightened opportunity costs for gold investors. Han Tan, chief market analyst at Exinity, believes there is potential for gold to retreat further below the $2,300 mark as the market adjusts geopolitical risk premiums and anticipates technical corrections.

Despite these fluctuations, central banks have continued to show strong demand for gold, with purchases totaling 1,037.4 metric tons in 2023, slightly below the record set in 2022. Countries like Brazil, Russia, India, China, and South Africa have collectively added nearly 5,000 metric tons to their reserves over the past 15 years. This robust buying activity underscores a strategic shift away from the U.S. dollar, emphasizing a diversification into gold.

Looking ahead, the outlook for gold remains mixed. While some analysts, like Razaqzada, no longer view gold as overbought and see its recent pricing as a potential base for future gains, others caution that the ongoing strength in U.S. Treasury yields and a strong dollar could continue to weigh on gold prices. The key question now is whether gold has established a near-term peak or if the recent pullback is merely a precursor to further records.

Gold is currently testing critical support levels around $2,300. If it fails to exhibit bullish behavior near this threshold, a deeper correction towards $2,222 might ensue, a level not seen since late March. Investors and market watchers alike are closely monitoring these developments, understanding that gold’s next moves could signal significant shifts in market dynamics.

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