- Gold trades around $2,500 as risk recedes, markets are calm and the US dollar recovers marginally.
- Traders are awaiting US labor market data this week before determining their next moves.
- The $2,500 level is key from a technical perspective, and threatens to give way under bearish pressure.
Gold (XAU/USD) is hovering around the $2,500 level on Tuesday as a measure of calm eases in the market, doing little to boost demand for gold as a safe haven.
The US Dollar (USD) – to which Gold is negatively correlated – is slowing its recovery rally, trading only marginally higher on Tuesday as traders remain cautious ahead of the release of potentially market-moving US labour market data later this week.
Investors appear to be quietly waiting for the “end results” for the patient – in this case the US economy – before drawing conclusions on the likely course of action to follow, in terms of the Federal Reserve’s (Fed) decision on how much to cut interest rates – a key driver for Gold.
Demonstrations in Tel Aviv demanding a ceasefire in Gaza after seven Israeli hostages were found dead and a call for a general strike by Israeli workers have, if only temporarily, lowered the threat level in at least one key geopolitical hotspot, adding to the uneasy calm permeating markets.
Gold traders look ahead to US jobs data
Gold prices are likely to see volatility with the release of US labour market data this week. In his crucial speech at Jackson Hole, Fed Chairman Jerome Powell shifted the focus from inflation to the labour market, which looks fragile, suggesting that the downside risks to employment now outweigh the upside risks to inflation.
If the labor market data due out this week in the form of the ISM Manufacturing Employment Index on Tuesday, JOLTS Job Openings on Wednesday, ADP Employment Change, Jobless Claims, and ISM Services Employment Index on Thursday, and Nonfarm Payrolls (NFP) on Friday, turn out to be weaker than expected and support their concerns, it will likely lead to a fall in the US Dollar (USD) but a rise in the price of Gold.
Markets are debating whether the Fed will need to make a 50 basis point (bps) interest rate cut in September or just a standard 25 bps cut. The latter is fully expected while market-based probabilities for the former currently stand at around 30%, according to the CME’s FedWatch tool.
If the labor market data is decidedly below expectations, the odds of a larger cut will increase, which in turn will give gold a boost on the charts. Lower interest rates are positive for the precious metal because they make it comparatively more attractive to investors as a non-interest-paying asset.
Technical Analysis: Testing the base of the mini-range
Gold (XAU/USD) is testing the base of the mini-range it has been trading in since late August, between $2,500 and $2,531. It is currently eroding the bottom of the range, making marginally lower lows as it moves lower. There is a risk that it could break lower and enter a new zone of activity between the sloping top of the previous range highs at around $2,470 and $2,500.
XAU/USD 4-hour chart
That said, the yet-to-be-reached upside target for Gold stands at $2,550 and remains active. This was generated after the original breakout of the previous range that began in July, which also looks like a triangle pattern due to its sloping edges.
This upside target was calculated by taking the Fibonacci ratio of 0.618 of the height of the range or triangle and extrapolating it upwards. This target is the minimum expectation for following a breakout based on the principles of technical analysis.
Gold’s medium- and long-term trends remain bullish, which, given that “the trend is your friend”, means that the odds favor the materialization of an eventual breakout to the upside.
However, a break above the August 20 all-time high of $2,531 would be required to provide further confirmation of an upside continuation towards the $2,550 target.
Alternatively, a break back into the previous range would negate the projected upside target. Such a move would be confirmed by a daily close below $2,470 (August 22 low). It would change the outlook for Gold and suggest that the commodity could start a short-term downtrend.
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 order 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.
Gold prices 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, Gold prices tend to rise when interest rates fall, while rising money prices often weigh down the yellow metal. Still, most of the moves 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
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
