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Gold retreats on US dollar strength and falling US yields

  • Gold down 0.4% on USD strength and falling Treasury yields following weak US employment data
  • The drop in April US Nonfarm Payrolls increases attention on possible Fed rate adjustments in September.
  • The market is awaiting comments from Fed officials and key data such as jobless claims and consumer sentiment indices.

The price of Gold retreated during the North American session, falling around 0.4% amid the strength of the US Dollar and falling US Treasury yields. A light economic agenda in the United States (US) would keep investors focused on Federal Reserve officials during the week after last Friday's US jobs report.

XAU/USD is trading at $2,315 after hitting a daily high of $2,329. Discourse in financial markets focuses on when the Fed will begin to ease monetary policy following the release of softer economic data. The US Department of Labor revealed that Non-Farm Payrolls for April came in at 175,000, below estimates and below the upwardly revised figure of 315,000 in March.

Following the release of the data, CME's FedWatch tool shows that the odds of a quarter-percentage-point cut in September rose from 55% before the report to 85%.

However, recent hawkish comments from Minneapolis Fed President Neel Kashkari, who said the Fed could hold interest rates on hold, opened the door to raising the federal funds rate if inflation does not resume its trend. on the downside, they strengthened the Dollar.

The current week's economic agenda will examine other Fed officials crossing the wires, along with initial jobless claims for the week ending May 4 and the University's preliminary release of consumer sentiment. of Michigan.

Daily market summary: Gold price rises towards $2,320 due to falling US yields

  • Gold prices fell amid falling US Treasury yields and the strength of the US Dollar. US 10-year Treasury yields are yielding 4.457%, three basis points lower than at the open. The US Dollar Index (DXY), which tracks the performance of the USD against six other currencies, rose 0.52% to 105.42.
  • Last Friday, US NFPs for April missed estimates and came in below March numbers. This, together with the entry into contractionary territory of the manufacturing and services PMIs of the Institute for Supply Management (ISM), could weaken the US dollar, which would mean a favorable wind for the gold metal.
  • Gold advances more than 12% so far in 2024 thanks to expectations that the main central banks will begin to reduce interest rates. Renewed fears of a resumption of the Middle East conflict between Israel and Hamas may lead to a rise in XAU/USD prices.
  • According to Reuters, the People's Bank of China (PBoC) continued to accumulate gold for the 18th consecutive month, adding 60,000 troy ounces to its reserves amid higher prices.
  • Following the data release, the odds of a Fed rate cut increased, with traders expecting 36 basis points of rate cuts by the end of the year.

Technical analysis: Gold price falls below $2,320

Gold's bullish trend continues despite Tuesday's decline. According to the RSI, the momentum favors buyers as the RSI is in bullish territory. Therefore, buyers could capitalize by “buying the dip.”

If XAU/USD breaks the $2,300 mark, it could put pressure on the bulls as the latest cycle low sits at the May 3 low of $2,233. Once surpassed, the door could open to test the 50-day SMA at $2,249.

On the other hand, if buyers lift the price of the gold metal, the next resistance would be the April 26 high, the last cycle high at $2,352. Once surpassed, the next stop would be the threshold of $2,400, followed by the April 19 high of $2,417 and the all-time high of $2,431.

Frequently asked questions about Gold

Why invest in 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.

Who buys more Gold?

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.

What correlation does Gold have with other assets?

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.

What does the price of Gold depend on?

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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