Gold prices slumped on Monday as upbeat US economic data strengthened the greenback and raised expectations of an earlier-than-expected tapering of monetary stimulus. The precious metal fell to its lowest level in over a week, with investors on edge ahead of Federal Reserve Chairman Jerome Powell’s testimony to Congress this week.
The US dollar index, which measures the greenback against a basket of major currencies, rose after a string of solid economic reports from the United States. This included positive manufacturing and services data, as well as a lower-than-expected unemployment rate. The stronger dollar makes gold more expensive for investors holding other currencies, reducing its appeal as a safe-haven asset.
Investors were already cautious ahead of Powell’s testimony, looking for clues on when the Federal Reserve would start scaling back its bond-buying program. The central bank’s massive stimulus measures have been supporting the economy and keeping interest rates low, leading to a surge in gold prices over the past year.
However, the recent batch of robust economic data has heightened expectations that the Fed may begin tapering its asset purchases sooner than initially forecasted. This has put pressure on gold prices, as the reduced liquidity from the central bank could drive up bond yields and boost the attractiveness of riskier assets.
Gold, often considered a hedge against inflation and a store of value during uncertain times, has been experiencing a volatile year so far. It rallied to an all-time high in August 2020 due to pandemic-induced economic concerns but has been struggling to maintain those levels as the global economy recovers.
The precious metal’s latest drop brings it closer to a key support level, which could trigger further selling if breached. Technical analysts are closely watching the $1,750 per ounce support level, warning of a potential downtrend if that level is broken.
Other factors contributing to the slump in gold prices include a general improvement in risk appetite among investors, as optimism grows about global economic recovery. The rollout of COVID-19 vaccines and increasing economic activity have led to a shift towards riskier assets such as stocks.
In addition, higher bond yields, which move inversely to bond prices, have also weighed on gold. The yield on the benchmark 10-year US Treasury note recently surpassed 1.4%, its highest level in over a year. Rising yields make bonds more attractive relative to gold, which does not offer any interest or dividends.
While gold prices are facing headwinds at the moment, it is important to note that the precious metal has had a history of bouncing back from dips. The ongoing uncertainties surrounding the global economic recovery, potential inflationary pressures, and geopolitical tensions can reignite investor interest in gold as a safe-haven asset.
Furthermore, any dovish signals or reassurances from Powell’s testimony that the Federal Reserve will maintain its accommodative stance could provide support for gold prices. Investors will be closely monitoring the chairman’s comments for any indications of the central bank’s future monetary policy decisions.
In conclusion, gold prices slumped on the back of strong US economic data, with the prospect of an earlier tapering of monetary stimulus. The precious metal faces key support levels that could determine its future trajectory. However, uncertainties surrounding the global economic recovery and potential inflationary pressures could provide support for gold prices in the long run. Investors will eagerly await Powell’s testimony for further insights into the Federal Reserve’s plans, which could influence gold’s performance in the coming weeks.