Gold Prices Drop Due to OPEC+ Oil Production Cuts

Gold prices are currently reported to be weakening as traders assess the likely path of the Federal Reserve's monetary policy after data showed a decline in US manufacturing activity and as OPEC+ production cuts stoke inflation risks.

Spot gold prices fell 0.2% to $1,980.39 an ounce, while US gold futures fell 0.1% to $1,997.70 an ounce by 0314 GMT. A slightly higher US dollar index (DXY) could complicate gold prices for overseas buyers as gold is usually traded in US dollars. In the near term, gold prices could consolidate without any fresh catalysts and this could happen as the market watches rising oil prices. Rising oil prices could affect the inflation outlook and complicate monetary policy decisions, which could affect gold prices.

According to OCBC FX strategist Christopher Wong, gold could see consolidative price action in the near term. This could be due to the lack of fresh catalysts that could significantly affect gold prices and the uncertainty in the market regarding rising oil prices and the inflation outlook. Oil prices are stable at the moment as investors are watching demand trends and the impact of higher prices on the global economy. However, on Monday, gold prices fell after a surprise cut in crude oil production by OPEC+. This made gold more expensive for overseas buyers, thus reducing demand for the precious metal. However, gold prices reversed course and rose by 1% as the dollar weakened after the release of weak US economic data. It is worth noting that gold and oil prices can influence each other and the price movement of one commodity can affect the price of the other. US manufacturing activity fell in March to its lowest level in almost three years, which could affect gold prices. 

Weaker new orders could trigger a further decline in manufacturing activity due to tighter credit conditions. Gold is considered a hedge against inflation, but with higher prices, the opportunity cost of holding the non-yielding asset also increases. Analysts estimate the probability of a quarter-point US Fed rate hike in May is around 60.1%. However, the likelihood of a rate cut by the end of the year is also increasing.

According to Marex metals analyst Edward Meir, in the short term (Q2), gold prices could be further supported by a scenario where inflation and interest rates peak. If this happens, the dollar will likely weaken and set the stage for further higher gold prices.

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