In the past few trading days, the international gold price has experienced a round of shocks and falls, falling back below the key integer level of $1,500 per ounce and returning to the "figure 5" level. The magnitude of this decline caught many gold bull investors off guard, and the nightmare returned. The main reason for this is that the haze of inflation has gradually dissipated, the Fed's expectation of interest rate hikes has risen, investors' risk appetite has risen, and the demand for gold, a traditional safe-haven asset, has cooled significantly.
First, the dollar index rose sharply, and gold depreciated relatively
Recently, the US dollar index has been strong, which is one of the main drivers of the decline in gold prices. The U.S. dollar index has risen nearly 5% since mid-March, hitting a new high in nearly two years, the data showed. The rise in the dollar index was mainly driven by positive US economic data and rising expectations of Fed interest rate hikes. As a dollar-denominated commodity, the price of gold will naturally depreciate relative due to the strength of the dollar.
Second, inflation expectations have cooled and safe-haven demand has weakened
Inflation has been one of the important factors supporting the rise in gold prices. However, recently, inflation data from various countries have been declining, and the expectation that the inflation peak may have passed has gradually formed a consensus in the market. The core PCE price index in the United States in March was 4.6% y/y, lower than market expectations; The Eurozone's preliminary inflation in April came in at 7% y/y, also lower than expected. The cooling of inflation expectations has directly weakened investors' demand for gold, a traditional inflation hedge.
Third, the geopolitical situation has eased, and global risks have been mitigated
Geopolitical risks are another important factor supporting gold prices. However, recently, there has been no further escalation of the war in Ukraine, the United States has made progress in nuclear negotiations with Iran, and the situation in the Middle East has been relatively stable. These positive signals have mitigated global geopolitical risks to some extent, thereby reducing investors' demand for the safe-haven asset gold.
Fourth, the technical pressure has increased, and the downward movement of gold prices has been enhanced
From a technical point of view, the downward momentum of gold prices is also increasing. Spot gold fell 2.6% on Friday, its biggest one-day drop since November 2022, to settle at $1,786 an ounce and fall further to around $1,770 on Monday. This has broken below the key support level of $1,800 and has technically created strong selling pressure.
Fifth, the Federal Reserve may accelerate the pace of interest rate hikes to suppress inflation expectations
The accelerated pace of interest rate hikes by the Federal Reserve is another important reason for the decline in gold. Federal Reserve Chairman Jerome Powell recently reiterated that he will continue to raise interest rates to control inflation. Most divisions expect the Fed to raise rates by another 25 basis points in June, and 50 basis points each in September and November. The faster pace of interest rate hikes will further weigh on inflation expectations and weaken safe-haven demand for gold.
Sixth, the bulls took profits, which exacerbated the decline in gold prices
In the process of gold price plummeting, many gold long investors chose to take profits. The data showed that holdings in gold-backed ETFs fell sharply by almost 2.5t on Friday, indicating significant profit-taking. This has undoubtedly exacerbated the downward pressure on gold prices.
7. The expected global economic recovery has boosted the demand for gold investment
Recently, economic data from various countries has been positive, and the global economic recovery is expected to be further boosted. For example, the U.S. retail sales data and employment data for March were strong. The boost in economic recovery expectations will weaken investor demand for safe-haven assets such as gold.
8. Investors turn to riskier assets with higher returns
Against the backdrop of economic recovery and cooling inflation expectations, investors' risk appetite is rising, and they are beginning to favor assets with higher risks but higher potential returns, such as stocks and technology stocks. As a result, funds have flowed out of safe-haven assets such as gold, which is also a significant reason for the decline in gold prices.
The gradual fading of the inflation haze, the rising expectations of the Federal Reserve's interest rate hikes, the rise in investors' risk appetite, and the increasing technical pressure have all contributed to the sharp decline in gold prices. Gold fell back below the key integer level of $1,500 and returned to the "figure 5" level, and the nightmare of bullish investors returned. Some analysts believe that gold's status as a traditional safe-haven asset has not wavered, as long as there are any twists and turns in the global economic recovery process, gold prices are expected to resume their upward trend. Therefore, investors need to continue to pay close attention to the market outlook.