Gold recovers slightly after Thursday’s decline to two-week low; upside seems limited
- Gold price edges higher as the strong US PPI-inspired USD rally lacks follow-through buying.
- Bets for an imminent Fed rate cut in September cap the USD and support the commodity.
- The upbeat market mood keeps the XAU/USD bulls on the defensive ahead of the US data.
Gold (XAU/USD) attracts some buyers during the Asian session on Friday and moves away from a two-week low, around the $3,330 area, which it touched the previous day. Data released on Thursday showed that US producer prices rose in July at the fastest monthly pace since 2022 and tempered bets for a jumbo 50 basis points (bps) interest rate cut by the Federal Reserve (Fed) in September. This, in turn, is seen as a key factor acting as a headwind for the non-yielding yellow metal. Apart from this, the upbeat market mood contributes to capping the upside for the safe-haven bullion, though the emergence of fresh US Dollar (USD) selling offers support.
Despite hot inflation data, market participants seem convinced that the US central bank will resume its rate-cutting cycle next month and lower borrowing costs twice by the end of this year. This keeps a lid on the overnight USD recovery from the monthly low and warrants some caution for the XAU/USD bears. Traders now look forward to Friday's US macroeconomic data, which, along with comments from influential FOMC members, will be scrutinized for more cues about the Fed's rate-cut path. Apart from this, the incoming headlines from the high-stakes US-Russia summit aimed at ending the war in Ukraine would drive the Gold price.
Daily Digest Market Movers: Gold price benefits from the emergence of fresh USD selling; bulls lack conviction
- Traders trimmed their bets for a more aggressive policy easing by the Federal Reserve following the hotter-than-expected release of the US Producer Price Index on Thursday. The US Bureau of Labor Statistics reported that the headline PPI accelerated from the 2.4% YoY rate to 3.3% in July, surpassing expectations of a 2.5% by a wide margin.
- The US Dollar rebounded sharply from the vicinity of its lowest level since July 28, touched on Wednesday, and triggered an intraday turnaround of around $45 in the Gold price. The USD recovery, however, runs out of steam during the Asian session on Friday as traders are still pricing in a 90% chance that the Fed will cut interest rates in September.
- Moreover, the CME Group's FedWatch Tool indicates the possibility of two 25-basis-point Fed rate cuts by the end of this year. This, in turn, keeps a lid on any further USD appreciation and acts as a tailwind for the non-yielding yellow metal during the Asian session. However, the prevalent risk-on environment caps gains for the safe-haven commodity.
- An extension of the US-China tariff truce for another three months eased concerns about a full-blown trade war between the world's two largest economies. Furthermore, hopes that Friday's US-Russian summit will increase the chances of ending the prolonged war in Ukraine remain supportive of the bullish sentiment across the global financial markets.
- Traders now look forward to the US economic docket – featuring the release of monthly Retail Sales figures, the Empire State Manufacturing Index, followed by the University of Michigan Consumer Sentiment and Inflation Expectations Index. The data might influence the USD and provide some impetus to the XAU/USD pair heading into the weekend.
- Nevertheless, the precious metal remains on track to register losses for the first time in three weeks, and the lack of strong follow-through buying suggests that the path of least resistance remains to the downside. Hence, any subsequent move up could be seen as a selling opportunity and runs the risk of fizzling out rather quickly.
Gold technical setup backs the case for emergence of fresh sellers near 100-hour SMA, around $3,355 area
The recent repeated failures to build on momentum beyond the 100-hour Simple Moving Average (SMA) and the overnight slide favor the XAU/USD bears. Moreover, oscillators on hourly charts are holding in bearish territory and have just started gaining negative traction on the daily chart. This, in turn, validates the near-term negative outlook for the Gold price.
Hence, any attempted recovery might confront a stiff barrier and remain capped near the 100-hour SMA, currently pegged near the $3,355 region. The latter should now act as a pivotal point, which, if cleared, could lift the Gold price back to the overnight swing high, around the $3,375 zone. The momentum could extend further towards reclaiming the $3,400 mark.
On the flip side, the $3,330 area, or a two-week low touched on Thursday, seems to have emerged as an immediate support. Some follow-through selling could make the Gold price vulnerable to accelerate the slide to the $3,300 mark. Acceptance below the latter would reaffirm the near-term bearish bias and set the stage for a further depreciating move.
Gold FAQs
Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.
Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.
Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.