Forex News

05:59:59 10-06-2024

Gold price consolidates below $2,300 mark, seems vulnerable to weaken further

  • Gold languishes near a multi-week low touched on Friday amid reduced Fed rate cut bets.
  • The stronger US NFP report suggests that the Fed might delay starting its rate-cutting cycle. 
  • The focus shifts to the US consumer inflation figures and the FOMC decision on Wednesday.

Gold price (XAU/USD) kicks off the new week on a subdued note and consolidates near its lowest level in over a month, below the $2,300 mark touched in the aftermath of blowout US monthly jobs data. The popularly known Nonfarm Payrolls (NFP) report showed that the world's largest economy created a lot more jobs than expected in May, forcing investors to scale back their bets for a September interest rate cut by the Federal Reserve (Fed). This keeps the US Treasury bond yields elevated and lifts the US Dollar (USD) to a nearly one-month high, which, in turn, is seen acting as a headwind for the non-yielding yellow metal. 

Adding to this, reports that the People's Bank of China (PBoC) paused gold purchases to its reserves in May, ending a massive buying spree that ran for 18 months, further seem to undermine the Gold price. That said, a cautious market mood lends some support to the safe-haven XAU/USD and helps limit deeper losses. Traders also seem reluctant to place aggressive directional bets ahead of this week's key US data and central bank event risk the release of the latest US consumer inflation figures and the outcome of the two-day FOMC policy meeting on Wednesday. This, in turn, warrants caution before positioning for further losses. 

Daily Digest Market Movers: Gold price is undermined by hawkish Fed expectations, stronger USD

  • The upbeat US employment details released on Friday fueled speculations that the Federal Reserve could delay the start of the rate-cutting cycle, which, in turn, is seen capping the upside for the non-yielding Gold price.
  • The headline NFP showed that the US economy added 272K jobs in May as compared to the 185K anticipated and the previous month's upwardly revised 175K, overshadowing an uptick in the unemployment rate to 4.0%.
  • Furthermore, Average Hourly Earnings surpassed consensus estimates and increased by 4.1% during the 12 months through May, which might push up prices and require the Fed to keep interest rates higher for longer.
  • The yield on the benchmark 10-year US government bond jumped to 4.45% after the data, while the rate-sensitive 2-year yield remains close to 5.0%, underpinning the US Dollar and acting as a headwind for the XAU/USD.
  • Meanwhile, the People's Bank of China (PBoC) snapped 18 months of continuous Gold buying in May, raising concern about decreasing demand for the bullion in one of the worlds biggest buyers and favoring bearish traders. 
  • Investors, however, prefer to wait on the sidelines ahead of this week's release of the latest US consumer inflation figures and the highly-anticipated FOMC monetary policy decision on Wednesday before placing directional bets.
  • The chances of a rate cut in September fell to around 50% following the US jobs data, from around 70% on Thursday, and the markets are now pricing in just one cut of 25 basis points this year, either in November or December. 
  • Hence, investors will look for fresh signals on when the Fed will begin cutting interest rates amid the still resilient US economy, which will play a key role in determining the next leg of a directional move for the commodity.

Technical Analysis: Gold price seems vulnerable to decline further, 50-day SMA breakdown in play

From a technical perspective, Friday's close below the 50-day Simple Moving Average (SMA) and a subsequent breakdown through the $2,300 mark could be seen as a fresh trigger for bearish traders. Moreover, oscillators on the daily chart have been gaining negative traction and suggest that the path of least resistance for the Gold price is to the downside. Some follow-through selling below the $2,285 horizontal support will reaffirm the bearish outlook and expose the next relevant support near the $2,254-2,253 region. The downward trajectory could extend further towards the $2,225-2,220 area en route to the $2,200 round figure.

On the flip side, any attempted recovery might now confront stiff resistance near the $2,325 horizontal zone ahead of the 50-day SMA support breakpoint, currently pegged near the $2,343-2,344 region. This is followed by the $2,360-2,362 supply zone, which if cleared decisively should allow the Gold price to retest last weeks swing high, around the $2,387-2,388 area and reclaim the $2,400 mark. A sustained strength beyond the latter will negate any near-term negative bias and pave the way for some meaningful near-term appreciating move.

Gold FAQs

Gold has played a key role in humans 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 doesnt 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 countrys 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.


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