Gold price sees worst week in 11 months, but is the market oversold?

The gold market is looking to close the week down around 4%, its worst weekly close since mid-June 2021. But its current price level of around $1,800 an ounce could put gold at risk of a bigger selloff, according to analysts.

Gold was hurt by technical selling pressure after dropping below the $1,830 an ounce Thursday, which served as support. The precious metals also suffered from higher U.S. dollar and expectations of an aggressive Federal Reserve following hotter-than-expected inflation data.

June Comex gold futures were last at $1,809.90 an ounce, down more than $70 on the week.

"We've seen the CPI come in stronger than expected this week. The 8.3% pace in April is problematic, especially after markets were expecting 8.1%. That automatically told us that the Federal Reserve would not soften its hawkish stance," TD Securities head of global strategy Bart Melek told Kitco News. "It's unlikely that inflation will come off sharply any time soon."

This outlook has weighed on gold and the precious metal moved significantly lower. "The $1,830 was good support, but we breached it. Now, $1,790 is the next support level as gold consolidates," Melek said.

Gold was also used this week for liquidity purposes amid a massive selloff in U.S. equities, with the S&P 500 falling 18% since the end of December.

"Gold's decline is investors covering losses elsewhere. Liquidation for traders and investors to make up for major losses seen in equity markets. Gold is one of the easiest things to convert into cash when times are tough," Gainesville Coins precious metals expert Everett Millman said Friday.

Looking into next week, if $1,800 is breached, gold is at risk of a steeper selloff. But traders should widen their trading range for gold in the short-term due to ongoing volatility in all markets, Millman added.

"Risk of falling further below $1,800 is present right now, more so than ever before this year. We are likely to see a lot of sideways trading," he told Kitco News. "Even with elevated downside risk, we still can get back above $1,900 in a matter of weeks. Traders need to widen gold's range due to the side effect of heightened volatility."

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The $1,830 to $1,790 is the likely range for gold next week, said Melek. "There is a risk of gold dropping even lower, especially if we see better than expected economic numbers, elevated energy prices, or disappointment in crop data. If the Fed rate hike estimates move up, gold gets hit a bit more," he added.

A lot of money was pulled out of all markets this week, including equities, crypto, and gold, said RJO Futures senior market strategist Frank Cholly. What matters now is the technicals, which is the $1,800 an ounce level for gold.

"It is a big level, and $1,775 could be in the cards as well," he told Kitco News. "The market at least pauses here and goes sideways as it builds another base and recovers. We've taken a lot of premium out of the market."

The gold market is now oversold, and it won't be surprising to see a bounce back to $1,865 an ounce and then to $1,900 an ounce, Cholly added. "The selling in gold is overdone, and it is closer to the bottom than the top at this level," he said. "A close above $1,840-$1,850 is necessary to encourage the move. Investors have to watch the U.S. dollar and interest rates."

Data to watch

Monday: NY Empire State manufacturing index

Tuesday: Retail sales, industrial production, Fed Chair Powell speaks at the Wall Street Journal Future of Everything Festival

Thursday: jobless claims, Philadelphia Fed manufacturing index

By Anna Golubova

For Kitco News

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