The gold market continued to slide this week, extending the downtrend that started in May after the market peaked. Gold has been reacting to the developments in the US in particular as traders have monitored economic data and the Federal Reserve.

The release of the Federal Reserve’s minutes on Wednesday has reinforced expectations of higher interest rates which could make gold less appealing in the face of higher yield risk-free assets. The anticipation of future rate hikes and the changing estimates regarding the peak rate could also play a role in undermining gold.

Investor confidence in US economy is picking up

At the same time, stronger-than-expected job market and PMI figures could support the Federal Reserve on its path toward tightening monetary policy. Stronger figures could, at the same time, fuel interest rate hikes while also improving investors’ confidence in the resilience of the economy, pushing them away from gold.

On the other hand, over the longer run the impact of the increasingly higher interest rates on the economy could eventually support gold prices over the medium term if data later shows a weaker-than-expected economy.

“While gold could continue to see downside potential, it could see volatile trading as uncertainty piles up around the state of the economy and the next steps of the Federal Reserve’s monetary policy,” said hedge fund manager Bas Kooijman, CEO of DHF Capital. “Volatility could remain elevated for the remainder of the week while new data comes up.”

Next week, traders are bracing themselves themselves for the release of US inflation data on Wednesday while gold could see some muted price movements in the meantime.

Debt ceiling crisis fuelled gold buying

Reports from the ETF sector indicate that investors had continued buying gold in May, with another USD 1.9bn flowing into gold ETFs. Previously out of favour, gold ETFs are being used as a safe haven. Many investors bought in during the US debt ceiling crisis. Some analysts reckon that the resolution of that crisis has removed a source of support for the gold price in June.

Demand for gold in Asia is also picking up, following four years in which retail investors in China and India stayed out of the market.

Source: The Armchair Trader