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Gold falls as Trump effect weighs on bond markets

  • Gold weakens on fears that Trump could win the next presidency, weighing on bond markets.
  • Fears of rising inflation under a Trump presidency with consequent rise in interest rates are negatively impacting Gold.
  • Gold is a non-interest bearing asset and tends to suffer when interest rates remain high.

He Gold (XAU/USD) fell on Monday in line with most commodities, which are declining due to global growth fears following weaker-than-expected U.S. jobs data last week.

Rising US Treasury yields, as a result of the increased odds that former President Donald Trump could win the upcoming presidential election in November, may also be weakening Gold. Trump is expected to cut taxes but maintain spending, leading to higher inflation and higher interest rates, which is negative for the non-interest-yielding asset that is Gold.

Additionally, short-term traders taking profits after the 1.45% surge seen on Friday could also be weighing in.

Gold weakens as bond markets suffer from Trump effect

Gold is trading at $2,370 on Monday, after retreating from Friday’s high of $2,393 hit following the release of US Non-Farm Payrolls (NFP) data.

Although weaker headline US labor market data in the NFP report raised bets that the Federal Reserve (Fed) will start cutting interest rates sooner than expected, which is positive for Gold, the price has started to decline due to a “Trump effect” in bond markets.

Given the doubts over President Joe Biden’s ability to stay in office and with no popular replacement on the radar, Trump is increasingly being seen as the most likely candidate to win the presidential election. Known for cutting taxes and borrowing to cover deficits, his fiscal policies will likely keep inflation high, leading to higher interest rates. This is having a negative impact on US Treasury bonds and pushing up yields, which are inversely correlated with Gold. The US Dollar is also benefiting from the outlook and further weighing on the price of Gold, which is mostly bought and sold in USD, according to Reuters.

Gold supported by the geopolitical context

Gold continues to draw some support, however, from other geopolitical and macroeconomic factors.

Ongoing conflicts in the Middle East and Ukraine continue to be factors driving nervous investors to store their wealth in Gold.

The intergovernmental organisation BRICS’ attempts to de-dollarise global trade continue to support the long-term outlook for Gold, which is seen as the most realistic replacement for the Dollar. The BRICS are trying to find an alternative to the US Dollar because of the way the US government has used the currency as a weapon against enemy states. If the Dollar were not so ubiquitous, US-led international sanctions would have less of an impact.

High demand from central banks, which accounts for about a quarter of the gold market, is an additional factor underlying gold. After the unexpected strengthening of the dollar in the first quarter of 2024, Asian central banks began accumulating gold to use it as a hedge against the depreciation of their own domestic currencies against the US dollar.

Technical Analysis: Gold could aim for all-time highs

Gold has risen to a major resistance level at the June 7 high of $2,388 and has pulled back. If it can break above Friday’s peak of $2,393, it will continue the sequence of higher highs and likely unlock the next target at the all-time high of $2,451.

XAU/USD Daily Chart

The bearish head and shoulders pattern that formed from April to June has been invalidated by the recent rally, however, there is still a possibility, albeit reduced, that a more complex top pattern has formed in its place.

If a complex pattern has formed instead of the orthodox head-and-shoulders pattern, and price breaks below the pattern’s neckline at $2.279, a downside reversal may still be possible with a conservative target at $2.171, the ratio of 0.618 of the pattern height extrapolated to the downside.

The trend is now sideways in both the short and medium term. In the long term, Gold remains in an uptrend.

Gold FAQs

Gold has played a pivotal role in human history as it has been widely used as a store of value and a medium of exchange. Today, apart from its luster 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 as it is not dependent on any particular 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 buy gold to improve the perception of the strength of the economy and the currency. High gold reserves can be a source of confidence in a country’s solvency. Central banks added 1,136 tonnes 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 on record. Central banks in emerging economies such as China, India and Turkey are rapidly increasing their gold reserves.

Gold has an inverse correlation with the US Dollar and US Treasury bonds, 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 fears 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 movements depend on how the US Dollar (USD) performs, as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep Gold prices in check, while a weaker Dollar is likely to push Gold prices higher.

Source: Fx Street

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