World gold prices reversed sharply in the last session of the week, falling more than 3% after Fed Chairman Kevin Warsh issued a tough signal on inflation, increasing expectations of interest rate hikes.
At the beginning of the week, gold futures increased by about 48 USD/ounce, exceeding the Fibonacci threshold of 38.2% at 4,692 USD/ounce. The upward momentum continued in the session of August 26, bringing gold prices to a 3-month high, reaching 4,697.66 USD/ounce.
However, the upward trend began to weaken from midweek. The US July PCE report showed that inflation remained high, with the overall PCE index increasing by 0.2% in the month and increasing by 3.7% compared to the same period last year. This data strengthened the USD and put pressure on gold prices.
By the end of the week, the reversal was stronger after the speech of US Federal Reserve (Fed) Chairman Kevin Warsh at the Jackson Hole conference. Mr. Warsh said that the Fed still has a lot of work to do if policymakers do not believe that core inflation is returning to the 2% target.
This message caused investors to increase bets on the possibility of the Fed raising interest rates. According to CME FedWatch, the probability of the Fed raising interest rates in September increased to 58%, compared to 36% before Mr. Warsh's speech. The probability of raising interest rates in December also reached 89%.
High interest rates are often detrimental to gold because precious metals do not generate interest income. When interest rates are expected to rise, bond yields and the USD tend to be supported, thereby reducing the attractiveness of gold.
In the last session of the week, December gold futures fell 150.70 USD/ounce, equivalent to 3.24%, to 4,504.10 USD/ounce. Spot gold prices also fell sharply, at one point down to 4,445.45 USD/ounce.
Thus, from the peak of nearly 4,700 USD/ounce set at the beginning of the week, gold prices have fallen more than 250 USD to the lowest level in the last session of the week. The sharp decrease also wiped out most of the upward momentum that the precious metal achieved in previous sessions.
Technically, gold prices have now closed below the 200-day moving average, around 4,641 USD/ounce. This threshold may shift from support to resistance in the coming sessions.
The next notable support zone is around 4,435 USD/ounce, equivalent to the Fibonacci level of 23.6%. If the price continues to penetrate this zone, downward pressure may increase and gold is likely to retreat further.
However, some experts believe that it is not necessary to rush to conclude that the long-term upward trend of gold has ended. The precious metal is still supported by concerns about US public debt, persistent inflation and asset protection needs.
The sharp drop after Jackson Hole may help the gold market relieve the overbought situation after a hot rally. If buying power reappears in important support areas, gold prices are still likely to recover.
In the short term, the 4.692 USD/ounce mark will be an important threshold that needs to be reconquered to strengthen the upward trend. If it passes this zone, the next target being followed by analysts is 4,900 USD/ounce.
Conversely, the fact that gold prices cannot hold the 4,435 USD/ounce zone will be a more negative signal for the short-term trend. At that time, the market may switch to monitoring lower support zones.
However, analysts' sentiment towards the prospects for next week has not completely shifted to negative. In the latest survey by a precious metals website with 21 Wall Street experts, 10 people, equivalent to 48%, predicted gold prices would increase; 6 people, accounting for 29%, said prices would continue to fall; the remaining 5 people predicted the market might move sideways.
Individual investors also lean towards a recovery scenario. Among 207 survey participants, 59% expect gold prices to increase next week, 21% forecast a decrease and 20% believe prices will remain flat.
Next week, investors will continue to focus on US economic data, especially the non-farm payroll report. These figures could directly impact interest rate expectations and determine the next direction of gold prices.
