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Gold bottomed after US data-inspired sell-off

  • Gold pauses and consolidates after a sharp sell-off on Friday.
  • US employment data showed more people joined the workforce in May and wages rose more than expected.
  • The data makes it less likely that the US Federal Reserve will cut interest rates in September, reducing gold’s attractiveness for investors.

The price of Gold (XAU/USD) takes a pause in the European session on Monday after falling almost three and a half percentage points on Friday following the release of better-than-expected US Non-Farm Payrolls (NFP) data. The yellow metal is trading just above $2,300 amid mixed market sentiment.

The upbeat wage and employment picture painted by US employment data on Friday suggested a radical reassessment of interest rate expectations in the US, with the Federal Reserve (Fed) now expected to hold rates interest rates higher for longer. This, in turn, had an immediate bearish effect on Gold by increasing the opportunity cost of holding the precious metal without yield, making it less attractive to investors.

Gold weakens after US jobs data recalibrates interest rate expectations

Gold price resumed its short-term bearish tone at the end of last week after US NFP data showed an increase of 272,000 in the number of new workers joining the economy in May, surpassing economists’ estimates of 185,000 and rising from a downwardly revised 165,000 in April.

Not only did payrolls beat expectations, but the data also showed that Average Hourly Earnings rose 4.1% year over year in May, up from the 3.9% forecast and upwardly revised 4.0% in April. This suggests that workers are earning more, which could increase spending and, in turn, inflation.

Market expectations that the Fed will cut interest rates in September fell to just over 50% after the NFP release from 67% previously, according to the CME FedWatch tool, which bases its estimates on price data from 30-day US federal funds futures.

That said, the price of Gold is supported by the different outlook for global interest rate expectations, which remain depressed. The Bank of Canada (BoC) cut its overnight interest rate by 0.25% to 4.75% last week, as did the European Central Bank (ECB). The release of lower inflation data in Switzerland has sparked speculation that the Swiss National Bank (SNB) could also cut interest rates at its June 20 meeting after an initial cut in March.

Gold traders will now look for further clues on price direction in the Federal Reserve’s June meeting, which concludes on Wednesday, as well as the US Consumer Price Index (CPI) data for May which They will be published the same day.

Asian passion for gold wanes

Gold came under further pressure at the end of last week following the release of official data showing that the People’s Bank of China (PBoC) had stopped purchasing more gold in May, ending an 18-month buying streak. for the central bank.

The data followed strong buying in April that saw China’s gold reserves on the PBoC reach an all-time high, representing 4.9% of total reserves, and following 18 consecutive months of growth.

Technical Analysis: Gold stalls during sell-off

Gold price broke below the bottom of the range at $2,315 on Friday and hit an initial downside target at $2,303, generated by the break of the original trend line in May. This target was at the Fibonacci ratio 0.618% of the length of the move prior to the breakout of the trend line, “a”, extrapolated downwards as “b” (see chart below).

The next target, which has also almost been reached, is around $2,285, the 100% extrapolation of “a”. A stronger move lower could see Gold find support at $2,279 (late April-early May low).

XAU/USD 4-hour chart

The RSI has briefly fallen into the oversold region before breaking out and rising back above 30.00, indicating the possibility that Gold could pull back in the short term. However, such is the strength of the previous downside move that Gold is likely to resume its downside move once the pullback is complete.

Despite the short-term weakness, the precious metal’s medium- and long-term trends remain bullish, and the risk of a recovery remains high.

Gold

Gold has played a fundamental role in human history, as it has been widely used as a store of value and medium of exchange. Today, apart from its brilliance and use for jewelry, the precious metal is considered a safe-haven asset, meaning it is considered a good investment in turbulent times. Gold is also considered a hedge against inflation and currency depreciation, since it does not depend on any specific issuer or government.

Central banks are the largest holders of Gold. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and purchase Gold to improve the perception of strength of the economy and currency. High Gold reserves can be a source of confidence for the solvency of a country. Central banks added 1,136 tons of gold worth about $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the largest annual purchase since records exist. Central banks in emerging economies such as China, India and Türkiye are rapidly increasing their gold reserves.

Gold has an inverse correlation with the US Dollar and US Treasuries, which are the main reserve and safe haven assets. When the Dollar depreciates, the price of Gold tends to rise, allowing 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 the price of Gold, while sell-offs in riskier markets tend to favor the precious metal.

The price of Gold can move due to a wide range of factors. Geopolitical instability or fear of a deep recession can cause the price of Gold to rise rapidly due to its status as a safe haven asset. As a non-yielding asset, the price of Gold tends to rise when interest rates fall, while rising money prices tend to weigh down the yellow metal. Still, most of the moves depend on how the US Dollar (USD) performs, as the asset is traded in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold in check, while a weaker Dollar is likely to push up Gold prices.

Source: Fx Street

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