- Gold prices skyrocketed in May but are now stuck in a rut.
- Today's inflation data is critical for gold's short-term direction.
- However, long-term investors have a silver lining: renewed activity in gold ETFs and a potential future Fed pivot.
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Gold prices soared to record highs in May, reaching $2450 per ounce. However, a swift correction followed, transitioning into a sideways trend. The Federal Reserve's hawkish stance remains the primary reason.
High interest rates, strengthening US dollar and rising Treasury yields are threats to gold prices. Today's inflation data is crucial for determining gold's direction in the coming days and weeks, especially considering the current downtrend.
Inflation Data Key to Short-Term Direction
Earlier this year, hopes of a Fed rate cut in June fueled a gold rally, further boosted by the geopolitical turmoil. But recent weeks have brought a reality check.
Persistent high inflation and a strong labor market suggest the Fed won't pivot anytime soon, potentially pushing the first rate cut to 2025. Additionally, signs of de-escalation in the Middle East don't help gold either.
If today's inflation data disappoints, gold prices could fall further, potentially reaching $2300 per ounce. However, this could be a positive sign for the long term.
The prospect of eventual monetary easing in the US remains, which will ultimately support gold demand.
China's Gold Buying on Hold
Central bank gold buying, particularly by the People's Bank of China, has been a major driver of gold prices in recent months.
However, May marked the first time in a year and a half that China did not increase its gold reserves. While it's too early to call this a trend shift, it might have contributed to the current correction.
Bullish Signs for Long-Term Investors
A silver lining for gold bulls is the renewed activity in physical gold ETFs, which saw positive inflows of $529 million for the first time since May 2023. This could bode well for the long term.
However, in the short term, the high ratio of retail traders holding long positions (2.26:1) could be a concern. If negative inflation data triggers a sell-off, gold prices could experience a sharper decline. The key support level to watch is the local low of $2280 per ounce from last month.
If the bears manage to break out of the indicated region then the next target should be the $2200 area.
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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.