Gold News: Rising Oil Prices Darken Gold Price Future Before Payrolls

Spot Gold Drops as Iran Strikes Push Oil Higher and Kill the Rate Cut Case

Spot Gold (XAUUSD) is pulling back Monday after hitting a two-week high late last week. The U.S. struck Iranian military targets over the weekend. Iran hit a U.S. base in response.

Spot Brent crude oil jumped more than 3% on the news and the inflation trade kicked in immediately. The U.S. Dollar Index firmed up. 10-Year U.S. Treasury yields climbed. Spot Gold (XAUUSD) dropped.

May finished down 0.9%, the fourth straight monthly loss. The safe-haven bid that should show up on a weekend like this did not show up because the market is trading gold on rates, not fear.

Why War Is Bearish for Gold

Higher oil means higher inflation. Higher inflation means the Federal Reserve stays restrictive or gets more restrictive. That is bearish for Spot Gold (XAUUSD). Every dollar that Spot Brent crude oil gains makes the rate cut case harder to defend. Transportation costs go up. Manufacturing costs go up. Consumer prices follow. The Federal Reserve cannot cut into that.

Traders who bought Spot Gold (XAUUSD) on geopolitical risk last week are finding out that the inflation side of the trade is bigger than the fear side. Gold does not pay interest. When the market prices in higher rates or fewer cuts, money moves into bonds and cash instruments that do pay. That flow has been running against Spot Gold (XAUUSD) for four straight months.

Strait of Hormuz Changes Everything

Investors had been pricing in progress between Washington and Tehran. The hope was that negotiations would eventually ease tensions and reopen the Strait of Hormuz. That hope died over the weekend. The latest exchange of strikes pushed traders back into the oil market hard.

Spot Brent crude oil gained more than 3% and the Strait of Hormuz remains effectively shut. As long as that shipping route stays closed, oil prices stay elevated. As long as oil stays elevated, inflation stays sticky. As long as inflation stays sticky, the Federal Reserve has no room to cut. That chain runs directly through Spot Gold (XAUUSD) and it is all negative.

Fed Speakers Could Make It Worse

Rate expectations have shifted fast. Futures markets are now pricing in roughly a 40% probability of a quarter-point hike by December. A rate hike. Not a cut. That would have been unthinkable a few months ago but resilient economic growth, a solid labor market, and rising oil prices changed the math. Beth Hammack, Lorie Logan, and Mary Daly are all scheduled to speak this week. If any of them lean hawkish or flag oil-driven inflation as a growing concern, the U.S. Dollar Index moves higher and Spot Gold (XAUUSD) takes another hit.

Dollar Strength Remains a Headwind for Gold

The U.S. Dollar Index eased slightly last week, but the broader trend still favors the greenback. Rising oil prices have renewed inflation concerns, yet the U.S. economy is generally viewed as being better positioned to absorb higher energy costs than many of its global peers.

That has helped keep demand for the dollar intact. For gold, that’s a problem. Because bullion is priced in dollars, a stronger greenback makes gold more expensive for overseas buyers, which can weigh on demand and limit upside momentum.

Markets are still watching developments in the Middle East closely. Any progress toward easing tensions could bring oil prices lower and take some support away from the dollar. For now, though, the currency continues to be a key obstacle for gold bulls.

Payrolls Report on Friday

Friday’s May Non-Farm Payrolls report is the one number that could change the rate story. Right now nothing else can. Economists are looking for 85,000 jobs and unemployment holding at 4.3%. A beat locks in the hawkish case. A miss is the crack the bulls need because it is the first thing that would give the Federal Reserve room to even talk about cutting. The ISM Manufacturing Index lands earlier in the week. Forget the headline number. The prices-paid component is what matters. Hot input costs and the inflation argument stays alive. Cool readings and the rate cut conversation gets a pulse.

Daily Spot Gold (XAUUSD) Technical Analysis

Spot gold is drifting lower on the daily chart after failing to follow-through to the upside, following the two day rally that ended the week on a high note. The trend is down according to the minor and main swing charts. The 50-day and 200-day moving averages are giving a mixed signal.

The 200-day moving average at $4406.59 is long-term support. It stopped the selling and attracted new buyers last Thursday when the market fell to $4366.23.

The 50-day moving average at $4628.63 has been providing resistance and downward guidance since March 18.

Inside this moving average range, traders have primarily been straddling a long-term 61.8% level at $4541.88 and the bull/bear line at $4481.78.

The chart pattern suggests that traders have been actively bidding for good prices or value, but have shied away from taking out offers or buying strength. Last week’s technical bounce from $4366.23 and subsequent rally to $4595.33 in just one-day clearly demonstrates what I’m talking about.

There are a number of ways to play this market at this time. One is to look for an upside breakout over the 50-day moving average. Another is to look for a breakdown under $4366.23. Corresponding with each particular move will be the reaction to the bull/bear line at $4481.78.

The bull/bear line represents 20% off the record high at $5602.23. Holding over it will indicate that buyers are defending it. The longer the market can stay above it, the greater the chances of a successful breakout over the 50-day MA.

Crossing to the weak side of the bull/bear line will indicate that sellers are taking control. If they continue to build a short position then they will play for a breakdown under the 200-day MA at $4406.59 and this could turn ugly since the next major support doesn’t come in until $4099.12.

What to Watch

The oil-inflation-rates chain is running directly against Spot Gold (XAUUSD) right now and nothing in this week’s calendar is likely to break it unless the data misses. Fed speakers, the ISM prices-paid component, and Friday’s Non-Farm Payrolls report all have the ability to push rate expectations further in the hawkish direction. If the 40% probability of a December hike moves higher, Spot Gold (XAUUSD) is going back to test the 200-day moving average at $4406.59 and the $4366.23 low from last week.

The bull/bear line at $4481.78 is where the week gets decided. Holding above it keeps buyers in the game and a breakout over the 50-day moving average at $4628.63 is still possible. Losing it puts sellers in control and the next real support below the 200-day is $4099.12. That is a long way down with nothing in between.

If you’d like to know more about how to trade gold, please visit our educational area.