Gold’s Fate Now Hinges on the Dollar and US Data After Friday’s Shock

• Gold and silver rebounded sharply from lows, but volatility remains elevated into the US session.
• US dollar recovery and easing geopolitical risk continue to pressure precious metals in the short term.
• Post-crash rallies risk selling into resistance as markets reassess rate cut expectations.

Both gold and silver managed to bounce noticeably off their earlier lows once Europe got underway following a significant drop on Friday. Gold was still down by around 3% at the time of writing, after falling by as much as 10% overnight.

It was always likely that we’d see metals face continued volatility in the early parts of the week, and so it proved with gold initially dropping to as low as $4400 before rising to almost $4780 at the time of writing in the space of a few hours.

Silver plunged to a low of $71.38, but it then bounced back to around $83.50 by mid-morning London trade. The heightened volatility comes following what was a black Friday for precious metals. Some traders were undoubtedly looking to buy the dip, which has so far proved to be the case.

But now others might be looking to exit on the back of this sizeable short-term rally, paving the way for yet more volatility once US investors come to the fray. Gold prices should remain quite volatile in at least the early parts of this week. But at least the risk of Iran being bombarded by the US has eased sharply after Trump said he was hopeful Tehran would make a deal. Oil prices have taken quite a bit of a dip on the back of this.

Later in the week, the focus will turn to US data and the US dollar, which could further influence the direction of gold prices. But after last week’s big plunge, it is possible that we may have seen at least a near-term peak in gold prices, making it a potential candidate for bearish traders looking to sell into resistance.

What Now After Friday’s Big Drop?

Gold and silver suffered one of their biggest percentage falls in years on Friday, following a scorching rally that had lifted prices to all-time highs just a day earlier. Gold ended Friday’s session off its lows but still some 9% lower on the day, holding below the key $5,000 level. This was gold’s largest intraday drop since the global financial crisis of 2008. For silver, it was even worse: a slump of more than 26% by the close, and as much as -36% at one point, making it a record intraday drop.

Precious metals have been extremely volatile in recent days, with silver in particular swinging wildly on an intraday basis. This, in and of itself, was a telltale sign of things to come. Some investors took heed and rushed for the exits at the first signs of trouble. And we may yet see more of the same with prices now bouncing back sharply off earlier lows.

Concerns about currency debasement had been one of the biggest reasons why investors had piled into the metals, given question marks over the Fed’s independence, with Trump constantly demanding rate cuts and trying to appoint a dove.

In the end, he opted for a more hawkish-leaning person to replace Jerome Powell, in Kevin Warsh. That triggered a big US dollar recovery as investors pushed their rate cut bets back and bought a severely oversold US dollar. Will we see a continuation of that move today and the rest of the week? Should the US dollar stage a more significant comeback, then sure, this will further add downside pressure to metals.

Meanwhile, trade wars and geopolitical tensions had also driven investors towards the safe-haven appeal of metals. But with Trump’s more conciliatory tone over the weekend, it looks like a military conflict with Iran will hopefully be avoided. Any further signs of de-escalation should be bad news for safe-haven assets.

Key Data and Central Bank Meetings Coming Up

Investors’ focus will slowly shift towards the US economy with plenty of macro data this week, with the release of the US jobs report on Friday. We will also hear from the likes of the European Central Bank, Bank of England, and Reserve Bank of Australia.

The US dollar hadn’t had a good start to the year until Friday, when it surged across the board. Until Friday, traders had preferred the appeal of precious metals and foreign currencies over the greenback. But has the trend already turned with Trump opting for Warsh?

Should we see a potentially strong set of jobs reports this week, then surely the US dollar will find more than just near-term support. NFP is the highlight on Friday, but don’t forget other labour market indicators released throughout the week, not least JOLTS Job openings on Tuesday, and employment components of the ISM surveys.

However, if this week’s employment data largely disappoints, then calls for further rate cuts in Q2 should grow louder – and that might trigger another golden wave for the precious metal.

Gold Technical Analysis and Levels to Watch

Gold’s big drop and the fact it has broken the key psychological level of $5,000, puts it on a bearish path in the short-term outlook, and so far that is precisely what has happened with the metal, initially dropping another 10% before finding good support from the key support area shaded on the chart between $4350-$4550.

This is where prior resistance meets a short-term trend line. It is likely that prices will need a lot of time now to digest these big moves before we potentially see signs of a bottom emerge again. For now, the path of least resistance will be to the downside. The onus is on the bulls to show they are still in control despite Friday’s big setback. Usually, after such big drops, you tend to see at least some downside follow-through, and that’s precisely what has so far happened.

For now, it is difficult to say when or at what price point might we see a bullish reversal. Let’s wait for more price action in the week ahead.

Still, levels like $4500, the next psychological level on the downside, should be watched closely. On the upside, $4,895, $5,000, and $5,100 are the levels where we might see some action around. These levels were all prior support levels.

***

Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.

Read my articles at City Index