Gold held below $4,550 on Monday after touching its lowest level since 30 March. Demand for the US dollar stayed firm amid geopolitical uncertainty and higher oil prices, which added to inflation concerns and expectations of tighter US monetary policy.
A drone strike caused a fire at the Barakah Nuclear Power Plant in the UAE. Saudi Arabia said it intercepted three drones launched from Iraq, while President Donald Trump warned Iran to move quickly towards a deal.
Dollar Strength Weighs On Gold
The US blockade of Iranian ports and the effective closure of the Strait of Hormuz pushed crude oil to a two-week high. The CME Group FedWatch Tool shows traders pricing in over a 50% chance of a Fed rate rise by the end of this year, supporting Treasury yields and the dollar.
Markets are watching the FOMC Minutes on Wednesday and global flash PMIs this week. Geopolitical developments may keep driving volatility and influence gold.
In physical markets, discounts in India hit a record last week, while Chinese premiums stayed firm. These factors have not provided a clear floor for prices.
Technically, last week’s failure near the 100-day SMA and a drop below $4,500 would add to downside risk. The RSI is near 40 and MACD remains negative, with support at the 200-day SMA of $4,352.59 and resistance at the 100-day SMA of $4,790.55.
Options Strategy For Further Downside
The current environment strongly favors the US dollar, putting significant pressure on gold. With tensions in the Middle East boosting the dollar’s safe-haven appeal over gold, we see limited upside for the metal. Derivative traders should consider positioning for further weakness, with put options offering a clear way to capitalize on a potential slide towards the 200-day moving average.
Rising oil prices, now hovering near $110 per barrel for WTI crude after the Strait of Hormuz closure, are feeding directly into inflation fears. Recent CPI data for April showed headline inflation ticking up to 3.8%, prompting the CME FedWatch Tool to now show a 62% probability of a rate hike by September. This outlook keeps US 10-year Treasury yields firm above 4.75%, increasing the opportunity cost of holding gold.
Last week’s failure to break the 100-day moving average around $4,790 suggests sellers remain in control. We believe this level now represents a strong ceiling, making it an attractive strike price for selling call options or implementing bear call spreads. A decisive break below the 200-day SMA at $4,352 would signal a new leg down and likely trigger further selling.
Looking back, we saw a similar pattern in 2022 when the Fed’s aggressive hiking cycle overshadowed geopolitical risks, pushing gold lower despite the conflict in Ukraine. History suggests that when the central bank is this hawkish, the stronger dollar and higher yields tend to win the tug-of-war against gold’s traditional role. This reinforces our view that the path of least resistance is currently lower.
We are watching this Wednesday’s FOMC minutes closely for any language confirming the market’s hawkish interpretation. Any surprisingly dovish tone could cause a short-term squeeze, but the broader geopolitical and inflationary pressures are likely to cap any rally. Traders should remain nimble as headlines from the Middle East could inject sudden volatility.
