The recent strength of the US dollar and better-than-expected US economic data have led to a correction in the gold price. The market is now waiting for the Federal Reserve’s thoughts, with the $2,000 level currently providing support for gold.
Recent US data releases, including weekly jobless claims and manufacturing data, have surpassed expectations, indicating that the US economy is still performing well. This has reduced the likelihood of the Federal Reserve needing to cut or pause interest rates this year. Additionally, comments from Fed official Lorie Logan have suggested that a pause in the rate hike cycle at the upcoming central bank meeting in June may not be appropriate.
Strength in the US dollar has weighed on gold.
The strength in the US dollar, driven by the positive economic data, has weighed on commodity prices, particularly gold, which is denominated in dollars. At the same time, discussions between the White House and Congress regarding raising the debt ceiling have added to market uncertainty. Investors are closely monitoring the possibility of a default on US debt if negotiations fail. President Joe Biden and Speaker of the House Kevin McCarthy have expressed their intention to reach a deal soon, with talks scheduled for Sunday. Biden has expressed confidence in avoiding default, while McCarthy believes a debt-ceiling deal could be reached by Sunday. However, experts caution that reaching a deal is only the first step in a potentially challenging process.
While the debt ceiling issue has diverted attention from the Federal Reserve’s stance on interest rates, economic data continues to show a tight labor market, giving the Fed more room to continue raising rates. The number of Americans filing new claims for jobless benefits fell more than expected last week, indicating the strength of the labor market. This contradicts the Federal Reserve’s view that the unemployment rate will increase to 4.5% by the end of the year, as explained by analysts at ANZ Bank.
Market participants are now eagerly awaiting commentary from Fed Chair Jerome Powell, which is expected on Friday afternoon. Powell’s remarks will be closely scrutinized in light of recent economic data and ahead of the Federal Open Market Committee (FOMC) meeting in June. The outcome of the debt ceiling negotiations before the June 1, 2023 deadline will also play a crucial role in determining the short-term strength of the US dollar and the prospects for the gold price.
Traders Sees Negative Break Below Key Level.
Technical analysis suggests that the gold price is defending the previous day’s downside break of the $1,975 support level, despite recent price movements. Key resistance levels to watch include $1,965 and $1,960, with the Fibonacci levels on the daily timeframe providing important support-turned-resistance levels. If the gold price manages to surpass the $1,975 hurdle, the next upside filter would be the Pivot Point one day R1 around $1,981.
In summary, the gold price is currently correcting due to the strength of the US dollar and positive US economic data. The market is closely monitoring the Federal Reserve’s stance and the outcome of debt ceiling negotiations, which will influence the short-term prospects for both the US dollar and the gold price.
The current state of the gold market bears a striking resemblance to the tumultuous era of the 1970s.
Gold has often been dismissed by investors as nothing more than jewelry, and those who advocate for gold as a hedge against financial crises are often labeled as eccentric. However, history has shown that these so-called “gold bugs” haven’t always been wrong.
In 1971, the price of gold stood at a mere US$35 per ounce and skyrocketed to touch the remarkable price of US$850. That’s a staggering 2,300 percent gain in just ten years. In stark contrast, stock investors in the western markets experienced a lost decade characterized by volatility and stagnant returns.
While the world didn’t come to an end in the 1970s, the era was plagued by double-digit inflation, oil price shocks, a weak dollar, and political instability. These factors instilled fear and uncertainty in investors, prompting them to seek refuge in gold as a tangible store of wealth. As the decade drew to a close, a veritable stampede to own gold ensued.
The question arises: could history repeat itself? In times of uncertainty, such as the one we currently find ourselves in, the appeal of gold as a safe haven asset becomes more apparent. With global economic challenges, geopolitical tensions, and market volatility, investors may once again turn to gold as a means of protecting their wealth.
Gold’s intrinsic value, limited supply, and longstanding role as a form of currency throughout history contribute to its appeal as a potential hedge against financial turmoil. It has proven its ability to preserve wealth and deliver significant returns during times of economic upheaval. While it’s important to approach any investment with caution and diversify one’s portfolio, it would be unwise to completely dismiss the possibility of gold playing a valuable role in navigating uncertain times. The lessons from the past serve as a reminder that gold has, indeed, shone brightly in the face of adversity before, and it could very well do so again.