Gold prices plummet to six-month-low: where is the bottom?

The price of gold slipped below $1900 per ounce this week, reaching its lowest point since March. This sharp downtrend is primarily attributed to the strength of the US dollar fueled by the escalating expectations of a higher interest rate.

US dollar sits on 10-month-high

While the US dollar has been on a steady ascent since July, the uptrend gained further momentum following the Federal Reserve's hawkish projections in the September FOMC meeting. According to the US central bank's estimates, another rate hike this year appears highly probable, potentially pushing interest rates in the US to 5.75%, the highest level in over two decades.

In addition, a series of economic indicators from the United States this week has exacerbated concerns about the economic outlook. This includes a decline in the US consumer confidence index to its lowest point in four months, along with increasing speculation about a potential government shutdown. These recent risk warnings have cast a brighter spotlight on the US dollar, which has a long-standing reputation as a safe-haven asset.

From a technical perspective, the US dollar has convincingly surpassed its December peak, with its next target now set at the November 2022 high of 107.3. Nevertheless, considering signals from the Relative Strength Index (RSI), the US dollar has notably entered overbought territory, indicating the possiblity for a short-term correction that could pull back to the imminent support at 106.2.

Nonetheless, in the medium-to-long term, the robust momentum of the US dollar is unlikely to be hampered as long as the narrative for higher-for-longer interest rates remains intact.

What’s next for gold prices?

The US dollar's significant surge has noticeably diminished the attractiveness of another safe-haven asset: shining gold.

Gold prices have been on an upward trajectory since October 2022, mainly due to the anticipation that the Federal Reserve's unprecedented pace of monetary tightening would soon come to an end, possibly resulting in a weaker US dollar. However, following the recent Federal Reserve meetings and speeches, not only has the hope for a rate cut in 2023 dissipated, but a lower rate in the first half of 2024 also appears unlikely.

According to the daily chart, gold prices have reversed nearly one-year-long uptrend by breaking through both the long-term trendline and the major moving averages, with a descending tunnel from their peak in May perfectly painted.

Furthermore, the breach of the crucial psychological level of $1900 has brought the price gap between 1867-1877 in view, which could potentially serve as imminent support for now. However, a further drop below this price range will substaintlly increase the likelihood of a further downtrend toward its yearly low near $1800. Near-term resistance is situated around $1886.