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(Kitco News) — The gold market has found itself in a tight spot as prices are down nearly 4% this week, their worst sell-off in nearly a year. After four consecutive weekly losses, the precious metal fell to its lowest level in three months. If you look at the market sentiment, gold may struggle to hold $1,800 an ounce.
This week’s sell-off was even worse as gold didn’t find any help from the latest inflation data. The US CPI this week showed annual inflation rose 8.3% in April. Consumer prices fell from a March reading of 8.5%. However, it was still much hotter than expected.
With gasoline prices at record levels nationwide and food prices soaring, there is a strong indication that inflation will be more steady than some expect, including the Federal Reserve.
Inflation also has a significant impact on consumer confidence. According to the latest University of Michigan survey, consumer confidence has fallen to an 11-year low. The survey also indicated that consumers now believe this is the worst time to purchase durable goods since the late 1970’s.
Despite all this disappointing economic news, the gold market cannot break. The Fed’s tight monetary policy stance appears to be working well. Inflation expectations have held up well.
The gold market faces two significant headwinds: rising bond yields and the US dollar.
Real bond yields have turned positive and are at their highest since the pandemic began. This is a terrible environment for non-yielding assets like gold. The US bond market is competing with gold as a safe asset in light of the increasing uncertainty.
At the same time, the monetary policy stance of the Federal Reserve also supports the bullish momentum of the US dollar. The US Dollar Index is trading at a 20-year high above 104 points.
This is not good news for gold prices.
Although gold is struggling in a challenging environment, some analysts remain optimistic that the precious metal can hold its ground, especially as stock markets face more uncertainty and increased volatility. Although gold has lost all of its gains this year, it still outperforms the S&P 500. Although the index has recovered to the 4,000 level, it is still down about 16% this year.
Several market analysts have suggested that stocks still have more to go in the bearish direction as interest rates rise.
“The role of gold in times of crisis and uncertainty is to preserve and preserve value, which it does,” Steve Land, vice president and portfolio manager of the Franklin Templeton Gold and Precious Metals Fund, said in an interview with Kitco News. “There is no doubt that there are a lot more moving pieces in the global economy than there have been for a long time. Gold’s low correlation with the markets means it’s somewhere investors can hide somewhat.”
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