Gold futures recently experienced a two-day drop of approximately 3%, marking their most significant decline since early February 2023. This recent pullback has sparked discussions among investors and analysts about the potential for gold to rebound and set new price records.
Fawad Razaqzada, a market analyst at City Index and FOREX.com, attributed part of the decline in gold’s value to a reduced likelihood of conflict between Israel and Iran, which lessened the metal’s appeal as a safe haven. On Tuesday, the June delivery for gold, the most actively traded futures contract, closed at $2,342.10 an ounce on Comex, its lowest finish since April 4. The day before, it had fallen by $67.40 to $2,346.40, cumulating to a nearly 3% loss over two days, the steepest drop in over a year.
Razaqzada had predicted this pullback, pointing to technical indicators that suggested gold was “extremely overbought.” The ongoing sell-off in bond markets, which has driven Treasury yields higher, also contributes to increasing the opportunity cost of holding gold, a non-interest bearing asset. As of the latest data, the yield on the 10-year Treasury had risen by nearly 9% for the month and 18% for the year.
According to Han Tan, chief market analyst at Exinity, there’s potential for gold prices to decline further into sub-$2,300 territory as the market continues to adjust geopolitical risk premiums. He noted that a technical correction was overdue, given the significant gains in gold prices driven by central bank purchases and expectations of future rate cuts by the Federal Reserve.
Central banks, particularly in countries east of Germany, have shown unprecedented demand for physical gold. Jan Skoyles, head of marketing at GoldCore, highlighted that central banks have been significant buyers of gold, with nations like Brazil, Russia, India, China, and South Africa accumulating nearly 5,000 metric tons over the past 15 years. This buying spree has coincided with a notable drop in China’s reported holdings of U.S. Treasury securities, signaling a shift away from dollar reliance.
The increase in gold purchases by central banks also aligns with a broader strategy to diversify reserves and hedge against currency risks. Skoyles emphasized the strategic nature of these purchases, suggesting a continued trend toward gold investment by central banks.
With the recent price adjustments, Razaqzada believes gold is no longer overbought. He anticipates that the price could stabilize around $2,300, a level he refers to as his “downside target.” While he remains cautious about the possibility of a deeper correction, his long-term outlook on gold remains bullish, expecting that new record highs could be on the horizon.
The market is now closely watching gold’s response to the current price levels. If gold fails to demonstrate bullish behavior around the $2,300 mark, Razaqzada warns of a possible deeper pullback toward the next significant support level around $2,222. Nonetheless, once gold clears the recent price surge’s excesses, this could create a favorable buying opportunity, especially with potential Federal Reserve rate cuts in the pipeline, as noted by Tan.
In conclusion, while the recent decline in gold prices has posed challenges, it also opens up possibilities for investors. The market’s response in the coming weeks will be critical in determining whether gold can resume its upward trajectory or if further corrections are necessary. As central banks continue their buying spree and the geopolitical landscape evolves, gold remains a key asset to watch in the financial markets.
