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Gold price plummets as risk appetite returns and Fed rate cut hopes rise

  • Gold stumbles after hitting a high of $2,391 amid renewed risk appetite.
  • Mixed US jobs data fuels speculation of an imminent Federal Reserve rate cut.
  • China’s PBoC halts gold purchases, impacting bullion prices along with falling Treasury yields.

Gold prices turned around on Monday, paring some of last Friday’s gains and falling more than 1% as risk appetite returned. US stocks posted gains while US Treasury bond yields edged lower. XAU/USD is trading at $2,358 after hitting a daily high of $2,391.

Last week’s US NFP report was mixed. June figures beat estimates, but downward revisions for April and May hinted that the US labor market is cooling sharply. Consequently, the US unemployment rate rose, sparking speculation that the Federal Reserve could cut interest rates sooner than expected.

Bullion prices were also affected by the People’s Bank of China’s (PBoC) decision not to buy gold in June, as in May, China had 72.80 million troy ounces of the precious metal at the end of June.

The yield on the 10-year U.S. Treasury note fell nearly two basis points to 4.27%, reflecting market participants’ expectation that the Federal Reserve will cut borrowing costs in anticipation of a potential hit to the labor market.

According to data from the CME FedWatch tool, investors are pricing in the probability of a Fed rate cut in September at 73%, up from 71% last Friday.

The U.S. economic calendar will include Fed Chair Jerome Powell’s semi-annual testimony before Congress and the release of consumer and producer inflation figures. Initial jobless claims and the University of Michigan’s consumer sentiment index will also round out the calendar.

Daily Market Wrap: Gold Price Falls Ahead of Jerome Powell’s Speech

  • US CPI is expected to decline from 3.3% to 3.1% YoY in June, while core inflation is projected to remain stable at 3.4% YoY.
  • According to consensus, initial jobless claims for the week ending July 6 are expected to rise to 240,000 from 238,000.
  • July consumer sentiment is expected to improve to 68.5, up from 68.2 in June, according to consensus.
  • Minutes from the June meeting of the Federal Open Market Committee (FOMC) showed that most participants viewed current policy as restrictive but opened the door to rate increases. Policymakers acknowledged that the economy is cooling and they could react to unexpected economic weakness.
  • The December 2024 federal funds rate futures contract implies that the Fed will ease policy by 39 basis points (bps) by the end of the year.

Technical Analysis: Gold Price Retreats Below the Neckline of the Head and Shoulders Pattern

Gold price has retreated after decisively breaking the neckline of the Head and Shoulders pattern, which took the XAU/USD price to $2,392 before falling towards $2,357, the current exchange rate, opening the door for a consolidation.

The momentum shows that buyers are losing strength, with the RSI slowing down towards the neutral line of 50, which, if crossed, will hint that sellers are coming into action.

If XAU/USD drops below $2,350, further declines could target the $2,300 level. If this support fails, the next demand zone would be the May 3 low of $2,277, followed by the March 21 high of $2,222.

On the other hand, if Gold prices rise above $2,400, further upside potential is seen, with the next resistance at the yearly high of $2,450, before $2,500.

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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