ATFX: Gold faces its worst week in six years. Can $4,500 become the bulls' final line of defense?

Topic: ATFX Forex Column Submission

On March 20, ATFX: The surge in crude oil, natural gas, and fuel prices caused by conflicts in the Middle East has intensified global concerns about inflation, reducing the likelihood of central banks lowering borrowing costs. Gold prices are on track for the largest single-week decline in six years. Currently, gold has already fallen over 6% this week, marking the biggest drop since March 2020. As we previously emphasized, the core reason for this abnormal drop in gold prices is a fundamental shift in market trading logic.

▲ATFX Chart

Since the outbreak of the Iran war, the performance of gold has echoed the declines of 2022. At that time, the energy shock caused by Russia’s invasion of Ukraine affected global markets. That year, gold prices fell for seven consecutive months, until October, setting the record for the longest losing streak in history. In both of these events, gold’s safe-haven properties were suppressed by expectations of monetary policy tightening induced by inflation.

After a record-breaking extreme market situation of seven consecutive days of decline, the market is most concerned with two questions: Why has gold suddenly accelerated its drop? Is there buying support at lower levels to trigger a rebound after the drop?

Inflation Concerns → Rate Cut Expectations Collapse

This week, the Fed, ECB, BoE, and BoJ, which held interest rate decisions, all leaned towards a hawkish stance on inflation concerns. As the market retracts the possibility of Fed rate cuts this year, attention is turning to the likelihood of the other three central banks raising rates later this year. As institutions point out, central banks in many European and American countries are holding steady while sending hawkish signals, leading to increased expectations for rate hikes. The tightening of monetary policy has triggered liquidity turmoil, with precious metals being the first to experience selling pressure. For gold, which does not yield interest, high interest rates often diminish its attractiveness.

Analysts at Commerzbank noted that the decline in gold and silver reflects the market placing higher weight on the inflation risks brought by the Middle East conflict, with expectations that the Fed may keep rates unchanged for a longer period. Analysts at ING stated that although geopolitical tensions typically support safe-haven demand, the inflation impact from rising energy costs is putting pressure on gold.

Since last month’s attacks by the U.S. and Israel on Iran, the prices of this widely regarded safe-haven asset have been falling weekly. The reasons for this decline include rising U.S. Treasury yields and a strengthening dollar, as investors sell gold to compensate for losses in other areas, as well as outflows from gold ETFs.

Currently, after two days of significant adjustment, gold is approaching the oversold range, which may indicate that the momentum for a rebound at lower levels is building up. The $4,500 level serves as a crucial support, and there is potential for it to attempt to recover some ground following position adjustments or buying at lower levels before the weekend. However, based on the current market sentiment, which remains weak, this rebound may be temporarily limited. Previously, the U.S. indicated that the war could end within 2-4 weeks; if this is the case, the market may experience a shift in direction. If oil prices significantly fall from high levels and lower inflation expectations, gold will likely show a notable rebound. After the negative factors have been exhausted, it may return to its value. However, the specific strength and extent of the rebound will depend on how quickly normalcy is restored in the Strait of Hormuz, the repair of energy facilities, the recovery of supply, and whether inflation in various countries has already been elevated. After all, history from 2022 tells us that rate hike expectations induced by energy shocks can suppress gold for as long as seven months. If the $4,500 level continues to be breached, it will threaten the February low near $4,400.

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Editor: Chen Ping