Where we are: Gold is currently trading around $4,585, testing overnight lows, after a significant drop overnight saw bullion shed 2%. The slide positions gold to fall roughly 3% for the week, and breaks through the $4,600 handle, a key support level we have been watching closely. The move wipes out gains from earlier in the week, leaving it below the prior NY close of $4,650.
What’s driving it: The primary driver remains the recalibration of Fed rate-cut expectations, fueled by stubbornly high US inflation. Rising US real yields and a stronger dollar are sapping gold’s appeal as a safe haven and inflation hedge, particularly after US wholesale and consumer prices both surprised to the upside. Adding to the pressure, news of further tightening of gold import regulations by India is weighing on physical demand, reflected in soaring discounts in the Asian market. While Fed officials Barr and Bowman both spoke yesterday, neither offered explicit guidance on the path forward for rates.
- US 2Y yield sits at 3.98%, down 2bp d/d but still elevated, keeping pressure on non-yielding assets like gold.
- India gold discounts soar to record high, reflecting impact of import duty hike and diminished demand.
- Speculator positioning remains modestly long (+163,303 contracts) but at a relatively low percentile (21st), suggesting limited short-squeeze potential, but more room to add to shorts.
NY session focus: Watch the 08:30 ET US data releases closely for any further surprises on the inflation front; stronger-than-expected prints will solidify the rate-hike narrative and could send gold spiraling towards $4,550. Conversely, a downside surprise could trigger a relief rally, pushing gold back towards $4,620. The Goldman Sachs call for energy stock strength could also translate into commodity complex strength. The trade that’s working right now is short XAU/USD, while the at-risk trade is holding long positions. The pain trade would be a dovish pivot from the Fed fueled by a sharp deceleration in inflation, catching the market off guard and triggering a rapid short squeeze.