Gold (XAU/USD) fell to a six-month low on Thursday, erasing its year-to-date gains as a firmer US Dollar (USD), hawkish Federal Reserve (Fed) expectations and technical selling weighed on demand. The metal hit $4,023, its lowest since November 2025, and was last around $4,080. Gold has dropped about 25% since the US-Iran war began in late February and is nearly 27% below its January peak near $5,600, while the US Dollar has taken precedence as the preferred defensive asset.
Rising energy costs have sharpened inflation concerns and shifted rate pricing towards the risk of a Fed hike this year, rather than at least two cuts expected at the start of 2026. US inflation climbed from 2.4% in January to 4.2% in May, the highest since April 2023, while May PPI rose 6.5% YoY versus 5.7% in April and forecasts of 6.4%; core PPI held at 4.9%, below the 5.4% consensus. Technically, XAU/USD is below the 200-day, 50-day and 100-day SMA, with RSI near 26 and MACD negative; DXY is above 100.00. Resistance sits at $4,446.50, $4,593.71 and $4,774.23, with support at $4,000 and $3,900.
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Bearish Outlook for Gold Driven by Fed Policy and Dollar Strength
Given the current market dynamics, we see the dominant trend for gold as bearish, driven by a hawkish Federal Reserve and a strong US Dollar. Our primary strategy should be to position for further downside, looking at buying put options with strike prices below the $4,000 psychological level. Selling gold futures contracts is also a direct way to capitalize on this downward momentum.
Recent commentary from Fed officials has only strengthened this view, with Fed Governor Waller stating last week that the central bank must “act decisively” to curb inflation, which markets interpreted as a signal for a potential rate hike in July. The CME FedWatch Tool now shows a 70% probability of a 25-basis-point hike at the next FOMC meeting, a stark reversal from the rate cut expectations we held in January. This aggressive policy stance makes non-yielding assets like gold increasingly unattractive.
The latest Commitment of Traders (COT) report from the CFTC confirms this bearish sentiment among institutional players. The data, released last Friday, showed that large speculators and hedge funds have slashed their net long positions in gold futures by over 60% in the last month alone. This is the most significant drop in bullish positioning since the fourth quarter of 2024, indicating that smart money is actively selling.
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Technical Levels, Market Volatility, and Strategy Implications
While the daily RSI is in oversold territory around 26, we view this not as a sign of a reversal but as a potential for a short-term bounce. Any rally toward the 200-day moving average, around $4,450, should be seen as an opportunity to initiate new short positions at a better price. We would not advise trying to catch this falling knife by going long.
The escalating conflict in the Middle East, with Brent crude recently topping $135 a barrel, is creating significant market volatility. This high implied volatility in the options market makes strategies like bear put spreads attractive. By buying a put at a higher strike and selling one at a lower strike, we can define our risk while betting on a continued slide in gold prices.
We can look to history for guidance, specifically the early 1980s under Fed Chair Paul Volcker. During that period, runaway inflation was ultimately crushed by aggressive rate hikes, which caused gold prices to fall sharply even as inflation was initially high. The current environment mirrors this dynamic, where the central bank’s actions to raise the cost of money are a far more powerful headwind for gold than its traditional appeal as an inflation hedge.
