Although gold ended last week down around $30 - its worst performance since February - the rebound on Friday afternoon is keeping gold's bullish trend alive.
The gold market recovered after Federal Reserve Chairman Jerome Powell said interest rates may not have to rise as much due to tightening credit conditions following banking sector turmoil.
This was a sign that the Fed may pause in June. After Powell's comments, market expectations for a rate hike in June dropped from roughly 50% to 20%, according to CME FedWatch.
Gold baffles the markets now.. between expectations of moving to record levels, and expectations of a halt in the rise in a changing macroeconomic environment.
The news calmed gold sellers after market participants started pricing in another 25 basis point hike next month and cut bets on a rate cut in the second half of the year.
At the May meeting, the Fed rose for the 10th time in a row, raising the federal funds rate to a range of 5-5.25% - the highest level since mid-2007. In just over a year, the Fed raised interest rates by 5%. %. The next monetary policy meeting is scheduled for June 13-14.
On top of expectations for variable interest rates, debt ceiling progress took a hit on Friday afternoon as talks to raise the federal government's $31.4 trillion debt ceiling paused.
Wall Street thought we would see the text of a bill over the weekend or early Monday, with a possible vote in the middle of the week, said Edward Moya, senior market analyst at OANDA. That seems less likely now and could increase the risk that we won't get a deal before June 1st.
Moya continued, given the division in US politics, the issue of the debt ceiling will intensify again.
Decreased bets for a rate cut
One development that will continue to weigh on gold is diminishing interest rate cut expectations, said Everett Millman, precious metals expert at Gainesville Coins.
Almost everyone in the market was convinced that the Fed was about to cut interest rates in the second half of this year. But since inflation has not fallen as much, the economy is resilient, and the unemployment rate is low, the big traders are off those bets on lower interest rates.
Millman added that with record highs testing gold just over two weeks ago, investors are also taking some profits off the table, accelerating the move lower.
Moya noted that it was a disastrous week for gold in general, but that it ended on a positive note. He said: People are having second thoughts about whether we are heading towards a recession that kills the safe-haven demand.
What's next for the gold price?
The next scenario for Millman is that gold bounces from here - something he has done repeatedly in the past year.
Although I wouldn't rule out a drop to $1900, my base case scenario is to see gold rebound as it's already been sold off.
Melman noted that after Powell's comments, there is a good chance the Fed will pause in June, giving the US central bank the option to move forward.
Keep in mind that it takes 12-18 months for rate hikes to start appearing in economic data. The Fed has been riding aggressively in a very short period of time, and we won't see results until the second half of this year. He said stopping in June would be reasonable.
The immediate gold resistance will be $1980 and then $2000 an ounce. Millman noted that the strong support level is between $1960 and $50. If that fails, it could be $1,900.
Moya also sees support at $1950 and resistance at $2000 an ounce.
Moya added: If debt ceiling talks continue to suffer, prices could easily hold above $2,000 this week.