Gold prices underwent a bit of a rollercoaster ride on Wednesday, spurred by softer-than-expected U.S. CPI data that triggered a steep pullback in U.S. Treasury yields. In early morning trading, the precious metal managed to rally by nearly 0.85%, only to see its gains short-lived, with XAU/USD slipping about 0.2% to $2,035 by the late afternoon in New York.
While bullion’s counterintuitive reaction to bond movements has puzzled some analysts, it may suggest that the market has already pre-traded the “slowing inflation” theme. After all, gold prices have risen by more than 11% since early March, meaning the rally was likely overstretched.
In order for gold to regain its bullish momentum, nominal bond yields would need to fall even further. Despite this, the preconditions for gold to shine once again are not too high, as growing headwinds for the U.S. economy, including tightening credit conditions for businesses and households in the aftermath of the U.S. banking sector turmoil that first erupted in March, could tip the country into a painful recession later this year.
Forward-looking traders will try to get ahead of the Federal Reserve by front-running steep rate cuts and exerting downward pressure on the Treasury curve. Against this backdrop, it is only a matter of time before the 10-year yield heads toward new multi-month lows below 3.25%, which was its April trough in 2023.
The specter of a looming recession, coupled with the unresolved U.S. debt ceiling drama, could soon drive increased demand for safe-haven assets, such as gold. Historically, gold has been considered a defensive asset, which would benefit from flight-to-safety episodes in financial markets.
Despite the XAU/USD’s bullish bias remaining intact for the time being, a period of consolidation should not be ruled out following the strong rally witnessed over the past two months. This means that gold could stay trapped in a narrow range in the near term.
When it comes to key technical thresholds to watch, initial support for gold prices rests at the psychological $2,000 level. If this floor is breached, we could see a pullback toward $1,975. On the upside, the first resistance to consider appears at $2,050. If bulls manage to take out this barrier, however, a retest of the 2023 highs could materialize shortly thereafter.