Gold declines as Middle East tensions subside, and investor’s focus shifts

Gold futures prices have declined for the last three consecutive days. This price decline occurred after gold futures hit a record high of $2,413.80 per troy ounce on Friday, April 19th, propelled by rising geopolitical tensions in the Middle East. That being said, gold is still showing a respectable 17.06% gain from one year ago.

As of 5:25 PM EDT, gold futures basis the most active June 2024 Comex contract is currently trading down $6.80, or 0.29% at $2,328.90 in light volume of 178,285 contracts traded. The April contract opened at $2,335.70 and traded between $2,324.80 and $2,350.90 before settling at $2,328.90.

After Monday's dramatic $60 price decline, both spot and gold futures pricing has steadied with modest daily price declines. The primary force that took gold substantially lower in a single day was a direct result of an easing of risk premium connected to tensions in the Middle East.

According to Jim Wyckoff, senior analyst at Kitco Metals, "Market focus is back on economic reports and the Fed. If we see hot inflation data, then it is going to be harder for the Fed to cut rates and gold could drop to below $2,200."

Today's moderate decline occurred concurrently with U.S. dollar strength, which added to downward pricing pressure. The dollar index gained 0.12% to 105.879. Rising U.S. Treasury yields also created bearish headwinds for the non-interest-bearing gold, with the 2-year note yield rising 3.8 basis points to 4.496% and the 10-year note yield up 5.6 basis points to 3.662%.

Considering gold futures traded as low as $2,026 on February 14th before surging to last Friday's record close above $2,413, a price correction seemed overdue. Market participants have now shifted focus to upcoming key economic data releases that will influence the Federal Reserve's monetary policy path.

The next major report is Thursday's Q1 GDP reading, followed on Friday by the core PCE inflation data for March: The Fed's preferred inflation gauge. According to experts, the core PCE index is expected to moderate slightly to an annual rate of 2.7% in March from 2.8% in February. The overall PCE is projected to accelerate to 2.6% from 2.5% previously.

While Q4 2023 inflation data had raised optimism the Fed's tightening was succeeding in bringing inflation closer to its 2% target, the recent upside surges in energy and housing costs have clouded that outlook and changed the expected timeline for eventual rate cuts.

The CME's FedWatch tool now implies the first 25 basis point rate cut is more likely in September rather than June as previously anticipated. Traders no longer anticipate the Fed lowering rates by 75 basis points by year-end from the current 5.25-5.5% range. 

A delay in Fed rate cuts makes gold a less attractive portfolio hedge, further explaining this week's pullback after the record run. However, many gold investors are still positioning for an eventual easing cycle, which tends to boost the precious metal's appeal.

Wishing you as always good trading,