Gold Prices Dip, But What's Next? Veteran Trader Explains
As traders react to the latest developments in geopolitical tensions and data released by the United States, gold prices are retreating from yesterday's highs. The question before them is where the prices will head from here, as both geopolitical tensions and U.S. economic data are highly significant factors.
Background
When Iran attacked Israel, we witnessed a surge in the prices of safe-haven assets, which is a typical trade for many investors. This is because when geopolitical tensions escalate, traders usually sell first and ask questions later. At the same time, they seek safety, and there is no better place to invest their hard-earned money and generate profits than gold. That being said, the U.S. Dollar Index, which is closely correlated with gold prices, also surged in the context of geopolitical tensions, as currency traders mostly prefer greenbacks when there is blood in the streets.
Price Action
Due to Iran's attack on Israeli territory, spot gold prices surged by more than 1% yesterday, and today they are trading lower (we will detail why they are lower later). As of today, the prices are mainly in negative territory but still far above yesterday's lows.
Today's price action is very similar to yesterday's highs and lows, indicating that traders are uncertain about which direction they should head in. This is because of geopolitical tensions—few know which way they will develop—and the second thing is U.S. labor data.
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Why Are Prices Lacking a Clear Direction?
Firstly, we have the U.S. ADP data, which is crucial for many traders as it sets the tone for the most important economic data, the U.S. NFP, which is expected to be released on Friday. The Federal Reserve has made it clear that they will adjust monetary policy based on the health of the U.S. economy—more importantly, the U.S. labor market. Today's numbers exceeded expectations, sparking discussions about potentially better numbers on Friday. This news is unfavorable for gold traders, as they have been anticipating a weakening U.S. labor market, which they believe will lead to further desperation from the Federal Reserve, possibly resulting in another 50 basis point rate cut. However, based on today's data, this scenario seems unlikely, leading to a stronger U.S. Dollar Index and a negative impact on gold prices.
Another factor for traders to keep an eye on is the potential attack by Israel on Iran. If this attack is more of a tit-for-tat response, we may not see an escalation of tensions, as Iran, similar to last time, will only delay their response. Therefore, this would require a situation where we might see further increases in gold prices.
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