Gold prices ended last week's trading at $3,995 an ounce, recording a weekly loss of nearly 3.9 percent after falling to their lowest level in nearly three months at $3,975 amid pressure from rising energy prices, increasing inflation fears and anticipation of the path of US interest rates.
A report issued on Sunday by Kuwait's Dar Al-Sabaik Company said that the decline in gold coincided with rising oil prices and escalating geopolitical tensions in the Middle East, which put global markets in front of an equation that combines growing demand for safe havens with pressures resulting from the possibility of rising interest rates.
He added that the gold market is awaiting this week the decisions of major central banks and US economic data, most notably the Federal Reserve meeting on October 27 and 28 and inflation data represented by the Personal Consumption Expenditures Price Index scheduled to be released on October 29.
He noted that the pressure on gold came amid a significant rise in oil prices, with oil climbing more than 4 percent and surpassing the $100 per barrel mark amid escalating concerns about disruptions to energy supplies due to military tensions in the Middle East and risks associated with shipping in the Strait of Hormuz.
The report stated that regional confrontations and tensions have increased uncertainty in the markets, with growing fears that the unrest could spread and affect global oil flows.
The report explained that rising energy prices lead to increased production and transportation costs, which may be reflected in price levels and complicate central banks' efforts to contain inflation.
He noted that consumer inflation expectations have stabilized at 4.7 percent over the next twelve months and at 3.5 percent over five years, levels that reflect continued concern about the trajectory of prices.
The report added that these indicators reinforce caution regarding the course of US monetary policy, as continued strong economic activity and high energy costs may limit the speed at which inflation declines and give the Federal Reserve justification to keep interest rates high for a longer period.
He explained that this equation is directly reflected in gold, which is affected by changes in interest rate expectations and real returns on US bonds, as higher returns increase the opportunity cost of holding the precious metal, while lower returns provide support for prices.
He stated that market expectations indicate a decline in the likelihood of an interest rate hike during the October meeting, compared to an increase in bets on a possible hike in December to around 78 percent.
He said this reflects a shift in investor attention from the anticipated decision at the next meeting to the course of monetary policy towards the end of the year amid continuing inflationary concerns.
The report added that markets are also monitoring the movements of the US dollar and Treasury bond yields as they are among the most prominent factors affecting the direction of gold, as the continued rise in yields may increase pressure on the precious metal, especially if this coincides with a rise in the dollar as a result of expectations of monetary tightening.
He stressed that signs of declining inflation or a slowdown in economic activity could limit the rise in returns and give gold a chance to recover some of its losses.
He explained that the relationship between gold and the dollar does not remain constant under all circumstances, as the market response can change according to the nature of geopolitical risks and the demand for safe assets.
On the geopolitical front, the report stated that developments in the Middle East and risks related to energy supplies and maritime routes will remain among the most prominent potential drivers for markets during the current week.
He explained that escalating tensions may support demand for gold as an asset used for hedging in times of uncertainty, but that rising oil prices resulting from supply disruptions may increase inflationary pressures and prompt central banks to postpone interest rate cuts or keep them at high levels for a longer period.
He noted that gold is thus facing a double whammy, as it benefits from growing geopolitical risks but may simultaneously be under pressure from rising interest rate and yield expectations.
The report added that this week’s agenda includes a range of monetary policy decisions from the US Federal Reserve, the European Central Bank, the Bank of Japan, the Bank of Canada, the Bank of Thailand and the Reserve Bank of New Zealand.
He noted that the decisions and future directions of these banks will be closely monitored for any signals they may contain regarding global interest rate trends and the spreads between returns on major currencies.
He also noted that markets are also awaiting the release of the preliminary GDP readings for the United States and the Eurozone, along with US and European inflation data, including preliminary consumer price readings for Germany and several other major European economies, as well as inflation data for Tokyo and Australia.
From a technical standpoint, the report stated that gold faces a significant test after falling below $4,000 an ounce, with continued selling pressure and the short-term trend remaining vulnerable to further volatility.
He added that the $3975 level represents initial support after recording its lowest level during the last session, followed by the $3959 level and then $3941, which represents the lowest level recorded since the beginning of the year.
He explained that breaking these levels could lead to increased selling pressure, especially if it coincides with a rise in the dollar and yields and renewed expectations of a tightening of monetary policy.
The report stated that gold, on the other hand, needs to recover the $4,000 level and hold above it to improve short-term momentum, while the $4,100 level represents an important initial resistance, the breach of which may pave the way towards the $4,200 level.
He added that exceeding these levels remains contingent on a more sustainable return of purchasing demand, along with the emergence of signs of easing inflationary pressures or a decline in expectations of interest rate hikes.
He explained that gold's ability to recover to the $4,000 level and then surpass the $4,100 resistance will be an important factor in assessing the chances of recovery, while continued trading below these levels, with a break in support zones, may keep downside risks in place.
On the local level, the report said that gold prices in the local market continue to be affected by the global market, as the price of a gram of 24-karat gold reached about 40.30 Kuwaiti dinars (about 130 US dollars), while 22-karat gold recorded about 36.9 dinars (about 119 dollars), while the price of a kilogram of silver reached about 601 dinars (about 1951 dollars), amid traders’ anticipation of global developments in precious metals and energy prices and US monetary policy decisions.
