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Gold Price Forecast: XAU/USD drops below $2,400, PBoC refrains from gold purchases for second month

  • Gold price drops to $2,385 in early Asian trading on Monday.
  • US nonfarm payrolls rose by 206,000 in June from 218,000 previously, above the expectation of 190,000.
  • China’s central bank has refrained from buying gold for a second month, dragging the price of the yellow metal lower.

Gold (XAU/USD) price is attracting some sellers near $2,385, snapping the three-day winning streak during early Asian trading hours on Monday. The yellow metal’s decline is supported by the modest rebound in the Dollar and the pause in gold buying by the Chinese central bank for the second month. However, safe-haven flows amid political uncertainty could lift the precious metal.

US nonfarm payrolls (NFP) employment rose by 206,000 in June, above the expectation of 190,000. The growth was lower than the previous reading of 218,000, according to the US Bureau of Labor Statistics (BLS) on Friday. Meanwhile, the unemployment rate rose from 4.0% in May to 4.1% in June. Finally, average hourly earnings rose by 0.3% monthly in June, meeting expectations.

The market is currently pricing in a 77% chance of a September rate cut by the US Federal Reserve (Fed), up from 70% last Friday, according to the CME FedWatch tool. Moreover, the FOMC minutes showed that policymakers acknowledged that price pressures were easing, triggering expectations of Fed rate cuts this year, which could drag the dollar lower and lift USD-denominated gold.

Moreover, political uncertainty in Europe, particularly in France, and geopolitical tensions in the Middle East could boost safe-haven flows, benefiting precious metals. According to The Economist, exit polls suggested that the left-wing New Popular Front (NFP) appears on track to win a majority of seats in the second round of voting in the French parliamentary elections on Sunday. Investors are concerned about the uncertainty as the final round of the French parliamentary elections pointed to a hung parliament.

On the other hand, data from China over the weekend showed that the People’s Bank of China (PBoC) refrained from buying gold for the second month. “It seems that gold prices are still a bit too high and the PBoC is waiting for a further pullback before resuming its gold buying program,” said Nitesh Shah, commodity strategist at WisdomTree. Notably, China is the world’s largest consumer of bullion and the pause in gold buying could weigh on the gold price.

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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