Gold Prices Stabilize and Recover After Sharp Decline

Gold (XAU/USD) has stabilized and rebounded after dropping more than $20 yesterday, currently trading around the $2,900 mark. Earlier, investor concerns over a potential U.S. economic downturn triggered broad-based declines across equities and commodities, with precious metals—especially gold—following suit.

Market Sentiment and Key Drivers

Gold held above $2,880 after sliding nearly 1% on Monday. Over the weekend, former U.S. President Donald Trump warned that the U.S. economy could face challenges before improving, emphasizing potential tariff adjustments in his trade policy. This fueled market concerns about a possible economic slowdown.

As financial markets experienced sharp declines, some investors liquidated gold positions to cover losses in other asset classes, leading to short-term downward pressure on the metal.

Despite recent volatility, gold has gained 10% year-to-date, setting new highs. The rally has been driven by uncertainties surrounding Trump’s policies, ongoing central bank purchases, and expectations that the Federal Reserve may further ease interest rates. Lower borrowing costs generally support non-yielding assets like gold.

ETF Flows and Hedge Fund Positioning

While higher gold prices have dampened physical demand in key Asian economies, inflows into gold-backed ETFs remain stable. According to Bloomberg data, gold ETF holdings reached their highest levels since December 2023 as of last week.

However, some investors had already begun reducing gold exposure ahead of Monday’s sell-off. The latest data from the U.S. Commodity Futures Trading Commission (CFTC) shows that hedge funds' net long positions in gold have fallen to a nine-week low.

Gold’s Long-Term Bullish Factors Remain Intact

Although the recent correction appears broad-based, underlying support remains strong. Factors such as geopolitical risks, the potential for global trade conflicts under Trump’s policies, and expectations of Fed rate cuts continue to provide a favorable backdrop for gold.

Focus on U.S. Inflation Data and Fed Policy Expectations

Investors are closely monitoring upcoming U.S. inflation data to gauge the likelihood of further Fed rate cuts:

Consumer Price Index (CPI) – scheduled for release on Wednesday

Producer Price Index (PPI) – scheduled for release on Thursday

Markets have now fully priced in a Fed rate cut in June. Fed Chair Jerome Powell noted on Friday that it remains unclear whether Trump’s proposed tariffs would lead to higher inflation. Generally, lower interest rates enhance gold’s appeal, as they reduce the opportunity cost of holding the non-yielding asset.

Technical Outlook: XAU/USD Price Action

On the daily chart, gold found support at the previously highlighted $2,880 level and has since rebounded, currently trading near $2,900. A decisive break above this level would be seen as a bullish signal, with upside targets at the 21-day EMA, followed by resistance at $2,929 and $2,942.

In the short term, gold remains in a consolidation phase, as depicted by two green trendlines. However, the medium-to-long-term outlook remains bullish, supported by an RSI holding above 50.

Key Levels to Watch:

Support: $2,880 – $2,868

Resistance: $2,900 – $2,929 – $2,942

As market participants await critical inflation data, gold’s near-term trajectory will likely hinge on Fed policy signals and broader risk sentiment.