Gold futures fall toward ‘critical support point’ of $2,000 an ounce after inflation report

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Gold prices fell close to the key support at $2,000 an ounce on Tuesday, touching their lowest intraday level of the year as a stronger-than-expected U.S. inflation reading raised the risk of changes to the Federal Reserve’s plans for interest-rate cuts.

The significance of gold dropping below $2,000 “lies in both psychological and technical trading perspectives, marking a crucial support point that, if breached, could lead to further sell-offs and a shift in market sentiment” for gold, Adam Koos, president at Libertas Wealth Management Group, told MarketWatch.

April gold

which is the most-active gold futures contract, was down $25.20, or 1.2%, at $2,007.80 an ounce on Comex after trading as low as $2,002.80. On low volume, the front-month February gold contract
was down $26.20, or 1.3%, at $1,992, which also marks its low of the session.

Both contracts touched their lowest intraday levels 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.

The weakness in gold prices is primarily a result of the “warmer-than-expected” consumer-price index data released Tuesday, said Koos. “This indication of persisting inflationary pressure supports the case for continued (or enhanced) monetary policy tightness by [Fed Chairman Jerome] Powell and the Fed.”

Consumer prices rose a sharper-than-expected 0.3% in January. The index was forecast to rise 0.2% by economists polled by The Wall Street Journal.

The yearly rate of inflation slipped to 3.1% from 3.4% in the prior month. It hasn’t been below 3% since March 2021.

Both the headline and core CPI figures exceeded forecasts as inflation remained “stubbornly higher than hoped,” said Bas Kooijman, chief executive officer and asset manager of DHF Capital in emailed commentary.

U.S. Treasury yields climbed higher in reaction, with 2-year yields
surpassing 4.6%, adding to the pressure on gold prices, he said.

The U.S. dollar also strengthened, with the ICE U.S. Dollar Index
up 0.6% at 104.82 in Tuesday dealings, weighing on dollar-denominated gold prices. “The currency has been improving since the beginning of the year and “could continue to do so if interest rates remain high,” said Kooijman.

“Hopes for an interest rate cut in May declined significantly after the inflation data release and have now shifted toward June,” he said. “High interest rates for longer could weigh on gold’s prospects over the coming weeks.”

However, gold could find “some support over the medium term as markets continue to see rate cuts happening later this year,” said Kooijman. Additionally, “geopolitical developments and potential economic issues in other regions could attract investors toward the asset.”

On a technical trading level, the key resistance level of around $2,074 will be key to watch, said Koos.

Gold has been in a “huge, broad consolidation pattern since way back in June of 2020, with several failed attempts to break above” that key resistance level, he said. “This ‘tug-of-war between bullish and bearish forces continues to persist as the market fears the next Fed meeting and how the CPI data might cause [the central bank] to react.”

A breakout above $2,074 would be an “enormous event for gold through year-end, assuming it can hold,” Koos said.

“When an investment of any kind hits all-time-highs, the only sellers that remain are those looking to take profits — and those sellers don’t usually affect investments in big, long-term, bearish ways,” he said. Most-active gold futures reached a record settlement at $2,093.10 in late December.

“As inflation cools, the Fed calms, and interest rates fall, gold will eventually break out above that iron ceiling [of $2,074] and when it does, you can probably expect to hear people start coming out of the woodwork as former bears morph into bulls on the yellow metal,” said Koos.

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