The past week has seen an undeniable trend in the financial markets,one that has sent ripples through commodity assets,particularly gold,silver,and base metals.A notable decline has been recorded as the expectation for a soft landing in the U.S.economy gains traction.This sentiment has exerted substantial pressure on international gold prices,which have tumbled from their historic zenith around $2080,now hovering close to the $1950 mark.This downturn has raised questions and expectations about what the future may hold for precious metals.

Despite the current sluggish state of these markets,experts maintain a bullish outlook on gold in the long run.The prevailing belief is that as global monetary policy is likely to loosen gradually from this point forward,there are still promising prospects for gold's value.Recent manufacturing PMI data from Europe has underscored concerns regarding economic growth,signaling that the rhetoric surrounding "higher for longer" interest rates may soon become outdated.However,in the short term,gold may need to navigate through a period of consolidation due to the recent strengthening of the U.S.dollar.

As the dollar strengthens,it places added pressure on all dollar-denominated metals like gold.The dollar index has rebounded from recent lows around 100 to hit levels of 104,which is significant.Since the correlation between the dollar and gold has been negative and nearly 90% since last year,the recent surge of the dollar has inevitably impacted gold prices.On May 19,for instance,the dollar index surpassed the crucial threshold of 103,with traders eyeing the March high of 105.88 as the next potential target.Simultaneously,the number of initial jobless claims in the U.S.saw a large decrease to 242,000,the largest drop since 2021,further fueling speculation about the Federal Reserve's stance on interest rates for June—a meeting at which a pause previously seemed consensus.

In addition,progress in debt ceiling negotiations has contributed to gold's short-term decline.Just recently,Fitch Ratings placed the U.S.AAA long-term currency issuer default rating on negative watch,signaling a possible downgrade.Nevertheless,late on the same day,indications emerged that the negotiations surrounding the debt ceiling would likely reach a resolution soon,quelling fears of default to minimal probability.According to reliable sources close to the negotiations,the ultimate agreement may not be a long,intricate document but rather a streamlined pact with key figures on discretionary spending caps,including military expenditures.

Interestingly,throughout the last few months,investors seem not to perceive default as a tangible risk any longer.This shift in sentiment has been pivotal for market dynamics.Following a series of factors including rising bond yields,the attractiveness of non-yielding assets like gold and silver has diminished considerably.As of the latest trading week,U.S.Treasuries faced continued pressure,leading to eight consecutive days of decline in their prices.This phenomenon supports the yields,thereby bolstering the dollar while simultaneously applying downward pressure on precious metals.By Friday,the yield on the benchmark 10-year Treasury rose sharply to about 3.8%,a notable increase from its sub-3.4% level during the banking crisis,a period during which gold price had initially surged—a trend that seems to have since lost momentum.

The sustainability of this dollar rebound appears to be critical moving forward.Key factors that have historically suppressed the dollar,such as concerns of sovereign default,easing pressures,and recession risks,are gradually being alleviated.Keeping an eye on these evolving conditions is crucial,but in the short term,the dollar is likely to maintain its strength.As we immerse ourselves in the current trends,it seems fair to assert a bearish outlook in the short term.Gold prices are currently testing significant support levels.

For the bulls in the gold market,this has been a disheartening phase.The inability of gold to hold its ground above historic highs established earlier this month has raised alarms.Each time bullish candlesticks appeared,traders promptly engaged in selling due to the Fed's hawkish stance,which has driven bond yields higher.Unless there is a macroeconomic backdrop that favors gold or is detrimental to the dollar,gold will likely remain under pressure.

Gold is currently testing its first critical support level,just below $1960,previously established as a resistance zone.If this support holds,a climb back above the resistance level of $1980 might bring newfound confidence to the bulls.It is worth noting that if prices dip below the $1960 mark cleanly,it could reinforce a bearish sentiment,as experienced recently when prices dropped to around $1950.In this scenario,a further decline could bring gold down to about $1925,where long-term bullish trendlines may afford some support.

Given the prevailing bearish trend,any rebounds from these levels should be approached cautiously,as they might present selling opportunities rather than sustained upward movements.Until we observe a distinct bullish reversal signal,caution is advised for those in the bullish camp.

Looking beyond the short-term volatility,the long-term forecast for gold remains optimistic.Global monetary policies are expected to gradually ease,and central banks around the world are still in an accumulation trend,which bodes well for gold as a strategic asset.Varied central banks,including those in developed countries,have bolstered their reserve holdings,with the World Gold Council reporting that various official reserves added a record 228 tons of gold in the first quarter of this year.

Several central banks have ramped up their purchases,with notable contributions from institutions such as the central bank of Singapore,which increased its holdings by 68 tons,and China,which added 58 tons.China’s central bank has consistently raised its reserves for six consecutive months.As of April 2023,China’s official gold reserves stood at 66.76 million ounces,compared to 66.50 million ounces at the end of March.Other countries such as Turkey and India are also on the list of growing reserves,alongside the European Central Bank.

As economies hover on the edge of recession,gold’s role as a long-term strategic asset is being emphasized more than ever.Historical trends show that in the seven previous recessions,gold investments yielded positive returns in five instances.As we entered 2023,volatility stemming from the risks in the banking sector has magnified,and governmental purchases of gold underscore its significance within international reserve portfolios.

Despite the recent fluctuations in the metals market,the global economic indicators remain precarious.If we observe persistent weakness in manufacturing PMIs and steep risks indicating potential downturns in economic activity,the attention investors afford gold could increase appreciably.The drop in manufacturing data across Europe,coupled with signs of a slowdown in China’s economy,evokes significant concerns about the sustainability of the global recovery.While service sector PMIs have recently surpassed expectations,the disappointing performance of European manufacturing PMIs cannot be ignored—the global recovery appears to be losing momentum.