- The possibility of the Federal Reserve pausing its rate hikes has led to a surge in gold prices, reaching a new all-time high above $2,080 an ounce.
- Traders are betting that policymakers will be forced to stop raising rates to avoid further damage to the US banking sector and economy caused by overly-tight credit conditions.
- For gold to remain above the $2,000 support level, the dollar and US Treasuries must also remain supportive
The Federal Reserve hasn’t said for sure that it will pause its rate hikes from June. Yet, in the hours between Jerome Powell’s news conference after the Fed’s tenth post-pandemic rate hike and the start of Thursday’s electronic trading session in gold, bulls in the game had decided: It was time for a new record high.
Consequently, that means something else could come into play for gold: A new support level of $2,000 an ounce.
Both futures of the yellow metal on New York’s Comex and physically-traded gold bullion reached all-time highs above $2,080 an ounce on bets that policy-makers would have no choice but to halt rate hikes from here to prevent further ructions in the US banking sector and economy due to overly-tight credit conditions.
The last time gold got to record highs prior to this was in August 2020, in the aftermath of the coronavirus outbreak. Then, futures hit almost $2,080 while the spot price reached around $2,075.
The Fed, in its rate decision statement as well as Chairman Powell’s news conference, took pains to emphasize that the fight against inflation wasn’t over and that monetary policy from June onwards will be guided by assessment of upcoming data.
Even so, the dollar and US Treasury yields tanked on the mixed messaging traders got — yes, inflation was still high but it had also “moderated somewhat” and the “very, very strong” labor market had begun to see lower wages — prompting bets by gold bulls and other risk investors that the central bank was done with hikes.
Ed Moya, analyst at online trading platform OANDA, said just ahead of Thursday’s peaks in gold:
“The journey to record highs has been a long one for gold, but if the Fed is truly done lifting rates, further tightening of credit conditions could be the key catalyst.
Gold is rising as the Fed’s dovish hike may have sealed the fate for the dollar. The Fed could be forced to hike again, but that would require a stronger driving force than the cumulative impact of their 10 rate hikes and fresh economic and financial developments.”
The Dollar, Treasuries & Gold Interplay for $2,000 Support
Charts by SKCharting.com, with data powered by Investing.com
Dollar Index: While fears of a US credit meltdown, on-again, off-again worries about inflation and the specter of a recession — Powell mentioned the possibility of a “mild one”, at least — all contributed to gold’s runaway rally, for the yellow metal to stay above $2,000 on a daily basis, the dollar and US Treasuries have to be supportive as well.
Since mid-March, gold has darted in and out of the $2,000 territory. To anchor itself there, the Dollar Index must not cross 101.47 while bond yields, led by 10-year Treasury note, should remain under 3.47% on a daily closing basis, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.
Dixit breaks down the different trigger points to watch in the dollar, Treasuries and spot gold:
US 10-year Treasury note: At the time of writing, the Dollar Index remains under pressure below the daily Middle Bollinger Band of 101.47 and the 5-day Exponential Moving Average, or EMA, of 101.25.
There is a possibility for it to drop further to between 100.74 and 100.42 as the Relative Strength Index, or RSI, stands at 40, below the neutrality point of 50.
Stochastics at 9/40 also calls for further weakness in the Dollar Index as it eyes the 50-Month EMA of 98.84 should the weekly settlement come below the 100 week SMA of 100.66.
Yields on the US 10-Year note have dropped to 3.34 and were trading below the daily Middle Bollinger Band of 3.47 at the time of writing. Under pressure, they could decline further to 3.25 and even 3.15, unless a rebound helps yields reclaims 3.47.
Spot Gold: At the time of writing, the spot price of gold was seeing strong consolidation above the $2000 psychological handle, followed by a decisive breakout above the horizontal resistance zone of $2,010. This has provided the much needed floor for vaulting spot to all-time highs of $2,080 and above.
Looming risks of a debt ceiling deadlock and a growing banking credit crisis and bets of a June pause in Fed rate hikes could have a strong uncoiling effect on gold, lurch the spot price towards $2,098 initially, and then towards $2,148. 
A short-term correction towards the support areas of $2020-$2010 could also turn into a buy-the-dips opportunity for those who lost out on the run to $2,080.
The upward momentum will remain intact so long as the daily close remains above $2,000 — making that the new normal for gold should the support hold.
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Disclaimer: The content of this article is purely to educate and inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.