Gold prices sank this week to their lowest level in over a month, pressured by a stronger U.S. dollar and rising Treasury yields. The precious metal fell below the key $2,000 an ounce threshold amid growing doubts that the Federal Reserve will pivot dovishly in the coming months.
Fed Officials Push Back On Rate Cut Hopes
Hopes for a potential rate cut by the Fed this year have fueled gold’s rally over the past few months. However, those expectations were tempered this week after a series of hawkish remarks from Fed officials.
On Tuesday, Fed Governor Chris Waller argued that interest rates may need to keep rising if economic data remains strong.
“Further rate increases may be necessary to get inflation down to our 2% target,” Waller said. “I cannot guarantee that this process will be easy or smooth.”
Waller’s comments echoed similarly hawkish rhetoric from other Fed officials like James Bullard and Loretta Mester last week. Their pushback on imminent rate cuts has stoked concerns that the Fed’s tightening cycle may last longer than anticipated.
Gold Breaches $2,000 Support
The hawkish shift in tone from the Fed led to sharp losses in gold this week. Prices for the yellow metal tumbled more than 3% on Wednesday to break decisively below $2,000 an ounce – a key technical support level.
Gold hit an intraday low of $1,929 on Thursday, its weakest level since December 15th. The sell-off puts gold on pace for its largest weekly decline since early November.
Gold prices over the past five trading days. (Source: TradingView)
Surging Dollar Weighs On Precious Metals
Behind much of gold’s slide this week is strength in the U.S. dollar.
The Dollar Index, which measures the greenback against a basket of currencies, jumped to a seven-week high on Thursday. The dollar has surged around 2% so far this year amid rising U.S. Treasury yields and expectations for sustained hawkishness from the Fed.
A stronger dollar makes gold more expensive for foreign buyers, hampering demand. The inverse relationship between the two assets grows stronger during periods of dollar rallies like we’ve seen this week.
In addition, rising nominal yields on Treasuries make gold less attractive relative to yield-bearing assets. The benchmark 10-year Treasury yield climbed firmly above 3.50% this week after hitting six-week lows last Thursday.
Gold Miners Under Pressure
The rout in spot gold prices spells trouble for gold mining stocks, which tend to have high positive correlation with bullion.
The NYSE Arca Gold Miners Index (GDX) – which tracks large gold producers like Newmont and Barrick Gold – plunged nearly 6% for the week. Junior miners (GDXJ) fared even worse with an 8% drop over the same stretch.
On Wednesday, the GDX slipped below its 200-day moving average for the first time since September. The breach of this long-term trendline is yet another bearish technical signal for the gold mining sector.
The GDX gold miners ETF falls below 200-day moving average. (Source: TradingView)
With the GDX testing the lower end of its recent trading range, large gold producers may be vulnerable to even more selling pressure ahead.
Silver Follows Gold Lower
Silver joined gold in plunging to multi-week lows amid the hawkish Fed shift. Spot silver prices broke below $23 an ounce on Wednesday for the first time since late December.
As an industrial commodity with only partial monetary attributes, silver tends to amplify moves in gold. The gold/silver ratio ticked higher this week to around 82.5 as silver underperformed.
Going forward, the white metal’s path will depend largely on whether gold can reclaim key support above $2,000. Failure to do so may invite technical selling that drags both metals even lower.
Market Eyes Next Fed Decision
All eyes now turn to the January 31-February 1 Federal Open Market Committee meeting. The policy statement and press conference will provide critical insight into the Fed’s thinking around what level of rates are needed to sufficiently cool inflation.
The FOMC is unanimously expected to slow the pace of hikes to 25 basis points at this meeting. However, updated economic projections and tone from Fed Chair Jerome Powell have potential to further sway expectations around the terminal policy rate.
More hawkish signals could extend pressure on gold and silver prices. On the other hand, a dovish surprise may prompt an overdue relief rally after this week’s carnage.
For now, risks remain tilted to the downside until bulls can reclaim $2,000. But with bearish sentiment hitting extremes, gold may be setting up for at least a short-term bounce after its swift plunge.
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