Gold’s large selling program could be imminent

The price of gold has remained in the hands of the bears as the US dollar surged to print a new 20-year high at the start of the week.

The negative market sentiment stems from the risks associated with China’s COVID crisis, the Ukraine crisis, supply chain risks and what this all now means for commodity prices and the central bank reaction function in global monetary policy.

At $1,857, the Gold Index is lower by 1.38% on Monday. The US dollar is off the highs for the day, as per the Dollar Index 104.187, but is finding some support in mid-day New York trade, currently climbing from the 103.392 lows and back to being flat for the day so far.

The Fed’s 50 basis points rate hike, last week, could be digested as a measure to contain inflation without tilting the economy into a recession. 75 bps expectations were played down by the Fed chairman, Jerome Powell, which initially hurt the US dollar. However, the market pivoted the very next day and the greenback soared to what was at the time, a fresh 20-year high in anticipation of a solid labour market report.

Markets are anticipating a series of interest rate hikes from the US Federal Reserve and a global economic growth slowdown which has been supporting the US dollar. The dollar has risen for five straight weeks as US Treasury yields have climbed on expectations the Fed will be aggressive in attempting to tamp down inflation with no Fed pivot in sight which is a negative risk for the medium term.

On Friday, the solid jobs data consolidated expectations for more rate hikes in 2022 although due to lower wage inflation versus expectations, the prospect of 75bps rate hikes remains off the table. With that being said, the US inflation data will now be the next key data event.

‘Core prices likely stayed strong in April, regaining momentum to 0.5% MoM after recording 0.3% in March. While used vehicles prices likely declined again, they probably fell less sharply than in the last report. We also look for renewed strength in shelter inflation. Our MoM forecasts imply 8.1%/6.1% YoY for total/core prices, likely confirming March was the peak of the cycle.

Yields on most US Treasury notes have actually pared early gains to trade lower on Monday after the benchmark 10-year yield hit fresh 3-1/2-year highs as inflation fears continue to weigh on risk sentiment. The S&P 500- index down more than 2.7% as growth stocks were again pulled lower by climbing Treasury yields also.

There is an exodus in gold taking shape and analysts at TD Securities argue that ”gold prices need only close below $1,875/oz to catalyze a substantial selling program that could send the yellow metal below the psychologically important 200dma range.

As per the pre-open analysis, Gold, Chart of the Week: Bears eye a break of critical $1,875, the level has been well and truly compromised and the bears are moving in on last week’s low of $1,850.

From a 4-hour perspective, the price has broken the first layers of support which opens risk of significantly lower prices for longer:

As illustrated, the price has respected the pre-open analysis of the resistance and support structures while it melts away to the downside towards the prior week’s low. The market is currently around $5.00 short of the $1,850 week low.

The price action has also left behind a bearish head & shoulders chart pattern and a restest of the counter trendline would be expected to be met with supply. The near-term resistance, $1,861 is proving resilient so far. The 200 dma is located at $1,835.