Gold prices dropped over 4% following the nomination of Kevin Warsh as the potential new Federal Reserve Chair. Economic improvements in the US, particularly in manufacturing, also played a role in the gold market’s downturn. XAU/USD traded at $4,681, continuing its fall from last Friday, and dropping by more than 14%.
The ISM Manufacturing PMI reached 52.6 in January, marking a substantial recovery from December’s contraction. Despite US Dollar strength and increasing Treasury yields, gold prices remain below $5,000, rebounding from a daily low of $4,402. The Federal Reserve is holding rates steady, as decisions will continue to rely on forthcoming data.
Upcoming US Economic Updates
Upcoming US economic updates include speeches from Federal Reserve officials, job figures, S&P and ISM Services PMIs, and consumer sentiment data. The Nonfarm Payrolls report is delayed due to a government shutdown. The DXY index rose 0.74% to 97.54, with Treasury yields also climbing. In January, the S&P Global Manufacturing PMI recorded its highest reading since May 2022 at 52.4.
Gold’s price remains volatile, testing support levels even as sellers dominate. A price rise above $4,700 may lead to further gains, while falling below $4,600 could prompt additional declines. Factors affecting gold include geopolitical events, interest rates, and the US Dollar’s movements.
Gold’s sharp 14% decline from last week’s highs presents a new environment for us. The nomination of Kevin Warsh to lead the Fed and surprisingly strong manufacturing data have shaken the bullish consensus. This rapid shift suggests we should prepare for higher volatility in the coming weeks.
With the Fed remaining data-dependent, this week’s Services PMI and consumer sentiment reports will be critical triggers for the next move. We saw a similar dynamic back in 2025 when the manufacturing index finally broke a 16-month streak of contraction, leading to a significant repricing of rate cut expectations. That period saw the US 10-year yield climb over 50 basis points in a single quarter, crushing gold prices temporarily.
Strategies and Market Moves
We should consider buying volatility, as the sharp drop suggests implied volatility in gold options will rise. Traders with long positions may want to purchase puts with strikes around $4,500 for protection against a break of the key $4,381 support level. For those anticipating a bounce, short-dated calls above $4,700 could offer leveraged upside if the dollar rally cools.
The line in the sand for the current uptrend is the $4,381 support level, which we successfully tested. A failure to hold this on a closing basis would signal a deeper correction, likely targeting the $4,300 area. Conversely, reclaiming the $4,773 moving average would be the first sign that this sell-off was just a shakeout before the next leg up.
We must keep a close eye on the US Dollar Index and 10-year Treasury yields, as they are driving this move. Last year, we saw the DXY run from 95 to over 100 in the second half of 2025, which capped gold’s advance despite ongoing geopolitical tensions. Until the dollar and yields reverse their upward course, any rallies in gold are likely to be sold into.
