What Levels Will Gold See in the Short Term?

The gold market tested the resistance at $1,800 and hit a four-week high. However, the yellow metal slipped down following the hawkish comments from Fed speakers. Gold prices rose amid falling bond yields and rising recession fears. But one market analyst says investors should also pay attention to the supply side of the market.

“A strong dollar also puts pressure on gold”

He landed in Taiwan on Tuesday morning amid threats from House Speaker Nancy Pelosi’s visit to China that there would be ‘serious consequences’. Led by escalating geopolitical tensions, the price of gold rose to $1,805. However, gold gave back all its daily gains after the Fed’s aggressive rhetoric. Edward Moya, senior producer analyst at OANDA, comments:

Gold slid gains after Wall Street became optimistic that tensions between the world’s two largest economies would spiral out of control. A strong dollar also puts pressure on gold. Because the dollar’s pullback in the last few weeks seems to be over.

Fed speakers determined to rein in inflation

cryptocoin.comAs you follow on , Chicago Fed President Charles Evans said on Tuesday that the US central bank will continue to increase interest rates until it sees inflation fall. Evans added that he did not reject a 50 basis point increase in September.

San Francisco Fed President Mary Daly also said on Tuesday that inflation is still a problem. In an interview with LinkedIn, the Daily said the Fed has “a long way to go” before it reaches its price stability targets, especially after June inflation soared to 9.1% from a year ago. Daly also echoed the statements of Fed Chairman Jerome Powell last week. In this context, she added, everything going forward depends on data. By the way, Evans and Daly are not voting members this year. But his comments reveal some behind-the-scenes thoughts.

“Gold is trying to be a safe haven again”

Edward Moya states that a strong dollar for gold will continue to deter higher prices. The analyst comments:

Recent speeches from the Fed have bolstered the idea that the interest rate differential will largely remain in favor of the dollar. For this, the US dollar has seen a huge increase. Geopolitical tensions are also likely to attract safe-haven flows, predominantly in Treasuries. This will also support the dollar. Gold is trying to be a safe haven again. This latest international round of risk to the outlook will let us quickly find out if there is one.

What is needed for a trend change under?

According to TD Securities strategists, the precious metal needs to trade well above the $1,800 level for gold to see a significant change in trend and a sustained bullish rally. Strategists note that the prevailing hedging tone in the market due to US-China relations further supports the yellow metal through modest port flows. Continuing their evaluations, the strategists underline the following points:

However, the CTA will need to close north of the $1,820 level for more shorts from trend followers to occur and gold prices to trigger a change in trend signals. In this sense, the gold markets are facing a large amount of indifferent positions held by traders, whose gold still holds the title of being the dominant speculative force.

“Price is not determined unidirectionally in the market”

Erik Norland, executive director and senior economist at CME Group, said in a report released Tuesday that the supply of the gold mine has fallen. Norland notes that if demand remains strong, it should provide long-term support to prices. The economist also states that between 2016 and 2021, gold mining production fell by 7%.

In this context, Norland says in the report, “One reason why precious metal prices have increased in the last five years may be the decrease in new supplies.” The economist says it is possible for investment demand to increase price volatility in the short run. However, he notes that this is still not enough to support long-term bull markets. Norland comments:

Movements in gold prices are mostly attributed to demand-side factors. However, our analysis shows that demand and supply-side factors combined to create the decades-long bull and bear market. It also reveals that neither side of the demand-supply equation is solely responsible for gold price action.

“There may not be a strong recovery in gold production for many years”

Norland says his research also shows that gold and silver are sensitive to each other’s production levels. He says that when gold production increases, silver prices underperform. Looking ahead, Norland says gold production presents a mixed picture. He notes that gold miners generate huge revenues because the prices are well above the production costs. But he also notes that production continues to decline and miners struggle to replace ounces in the ground. Norland says that on average gold producers see profit margins of over 60% and operating margins of over 125%. In this context, he concludes:

The fact that current profit margins are high does not mean that we will see strong growth in the sector in the near future. Finally, even amid increased investment, there may not be a strong recovery in gold production for many years. So there is little reason to predict cuts to the world’s mines. Therefore, there is little reason to believe that today’s high prices will increase production of gold.

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