The conflict in the Middle East is weighing on gold prices amid expectations that central banks will raise interest rates to address rising inflation caused by oil prices. This seems like a knee-jerk reaction, because this is exactly how central banks have behaved in 2022. Moreover, it is widely acknowledged that this was a delayed response. Other factors working against gold are the decline in gold purchases, as well as the sale of gold from reserves to support national currencies, as India and Turkey did recently. It is possible that many others will do the same, but we don’t know that yet.
This is a somewhat short-sighted approach, because current fuel prices are a shock to consumers, and a shock to the economy will follow, requiring loosening, not tightening, monetary policy. However, we first need to hear that central banks share this view; For now, they remain focused on inflation.
Among the medium-term price targets, the $4,200 level remains important. If the price of gold falls to this level, it will remain within the uptrend. A break below this level would signal a reversal of a three-year uptrend. A bounce from this level would keep hope alive that gold’s upward trend is not over yet.
From a technical analysis perspective, last week gold may have found support at the 200-day moving average during its decline to $4,100. Strong buying continued until Thursday morning, when the price reached $4,800. The subsequent decline following Trump’s tough rhetoric did not trigger a new wave of gold selling, keeping hopes alive for a return to the upside.
It is very likely that gold will test the 50-day moving average near $5,000 again next week, finally breaking out of oversold conditions. This suggests a positive outlook for next week, but we remain cautiously pessimistic in the longer term, anticipating a drop to $4,200 in the medium term and a low of $3,300 for the bearish cycle we are already in.
