Higher Yields, Dollar to Cap Gold Prices Over Near-Term

Gold is inching higher early Monday as speculators try to recover some of last week’s steep $37.50 loss. On Friday, the precious metal hit a two-week low, putting it in a position to post its worst month since September.

At the start of the week, the fundamental picture looks gloomy, but technically, the market is finding support at the upper end of key area defined at $1782.50 to $1758.80. Our chart work suggests that this zone is controlling the near-term direction of the market, while a break under the September 29, 2021 bottom at $1725.00 will likely trigger the start of an acceleration to the downside.

At 07:08 GMT, April Comex gold is trading $1786.70, up $0.10 or +0.01%. On Friday, the SPDR Gold Shares ETF (GLD) settled at $167.07, down $0.53 or -0.32%.

Weighing on gold prices are higher Treasury yields and a strong U.S. Dollar. The catalysts driving all the recent action are and aggressive Federal Reserve and robust U.S. economic data.

What Did the Fed Do to Drive Gold Prices Lower?

Last week, the U.S. Federal Reserve told global investors it would likely hike interest rates in March. It also reaffirmed plans to end its bond purchases the same month in what U.S. central bank Chairman Jerome Powell pledged will be a sustained battle to tame inflation.

“The committee is of the mind to raise the federal funds rate at the March meeting assuming that the conditions are appropriate for doing so,” Powell said in a news conference, pinning down a policy statement from the central bank’s Federal Open Market Committee that only said rates would rise “soon.”

Subsequent interest rate increases and an eventual reduction in the Fed’s asset holdings would follow as needed, Powell said, while officials monitor how quickly inflation falls from current multi-decade highs back to the central bank’s 2% target.

Much was left undecided, Powell told reporters after the end of the Fed’s latest two-day policy meeting, including the pace of subsequent rate hikes or how quickly officials will let its massive balance sheet decline.

Put Powell was explicit on one key point:  that with inflation high and for now apparently getting worse, the Fed this year plans to steadily clamp down on credit and end the extraordinary support it has provided to the U.S. economy during the coronavirus pandemic.

Fed Lights Fire Under US Dollar

The Fed announcements drove U.S. Treasury yields sharply higher, making the U.S. Dollar a more attractive investment. The dollar hit an 18-month high against a basket of major currencies late last week.

Short-Term Outlook

Technically, the next major move in April Comex gold will be determined by how investors react to a pullback into $1782.50 to $1758.80. Right now, the futures contract is hovering just above this area. If it fails then look for a quick test of $1725.00. If this level goes then say hello to the upper $1600 range.

With the Fed leading the call for higher rates, gold’s gains are likely to be capped because higher interest rates raise the opportunity cost of holding non-yielding bullion. Furthermore, the firmer greenback makes bullion more expensive for holders of other currencies, fueling lower demand.

As long as these factors remain intact, traders are likely to stay in a “sell the rally” mode.