- The price of gold has remained trapped in a familiar range since the beginning of the current week.
- Positive risk sentiment limits the upside, but a combination of factors continues to provide support.
- The Fed’s bets on a rate cut, together with geopolitical risks, should help limit a significant decline in prices.
Gold (XAU/USD) remained stable above the psychological $2,500 mark during Thursday’s Asian session, remaining close to the all-time high reached earlier this week. Data released on Wednesday showed that US job market growth last year through March was significantly weaker than initially expected. In addition, July FOMC meeting minutes showed several officials leaning toward an immediate rate cut. This reinforced speculation of an imminent start to the Fed’s monetary easing cycle in September, which pushed the US dollar (USD) to a new yearly low on Wednesday and continues to act as a tailwind for the yieldless yellow metal.
However, investors expect more clarity if the not-so-strong US labor market justifies a deeper rate cut next month. This adds more weight to Fed Chair Jerome Powell’s speech at the Jackson Hole Symposium as it will play a key role in influencing near-term USD price dynamics and provide fresh impetus to gold prices. Meanwhile, the prevailing risk-on environment limits the safe-haven XAU/USD, although the lack of progress on a ceasefire agreement between Israel and Hamas should help limit the downside. Traders are now looking to the preliminary global PMIs, which along with the US macro data could provide near-term opportunities.
Daily overview of market drivers: Gold price is undermined by positive market sentiment, Fed’s dovish outlook limits downside
- The U.S. dollar plunged to a new one-year low on Wednesday in response to data suggesting the labor market was not as strong as expected, helping gold prices reverse an intraday decline to below $2,500.
- The preliminary annual benchmark employment data report released by the U.S. Bureau of Labor Statistics found that U.S. employers created 818,000 fewer new jobs than reported during the year through March.
- In addition, the minutes of the FOMC meeting on July 30 and 31 showed that an overwhelming majority of officials favored a rate cut in September, but some policymakers leaned toward immediate action.
- Markets are currently pricing in a 38% probability of a 50 basis point rate cut next month (compared to 29% the day before) and are expecting an easing of around 100 basis points by year-end, giving the yield-free metal a boost.
- Meanwhile, a ceasefire agreement between Israel and Hamas remains distant, continuing to pose the risk of a broader Middle East conflict and proving to be another factor lending support to the XAU/USD pair.
- Traders are now eagerly awaiting the US economic report – with the release of weekly initial jobless claims and existing home sales data – to find short-term opportunities later in the North American session.
- However, the focus of the markets will remain on Fed Chairman Jerome Powell’s speech on Friday to see whether the much weaker than expected US labor market growth is a strong argument for a deeper interest rate cut in September.
Technical Analysis: Gold price could continue to attract buyers, drop to $2,480 is key for bullish traders
From a technical perspective, the range-bound price action observed since the beginning of this week could be classified as a bullish consolidation phase before the next uptrend. Moreover, the oscillators on the daily chart remain in the positive territory and are still far from the overbought zone, confirming the short-term constructive outlook. Therefore, a move back towards a retest of the all-time high around the $2,531-2,532 area reached on Tuesday seems quite possible. Some follow-through buying is seen as a new trigger for bulls, paving the way for an extension of the recently well-established uptrend.
On the downside, any meaningful decline could continue to attract some buyers near the $2,500 round mark. This should support the downtrend in gold price near the $2,480 resistance point. A convincing break below this point could trigger some technical selling and pull the XAU/USD towards the $2,455-2,453 horizontal support en route to the $2,430 region. The corrective decline could continue further towards the 50-day SMA (Simple Moving Average), which is currently near the $2,400 mark.
Frequently asked questions about gold
Gold has played a key role in human history as it has been widely used as a store of value and a medium of exchange. Aside from its shine and use as a piece of jewelry, the precious metal is currently widely viewed as a safe haven asset, meaning it is considered a good investment during turbulent times. Gold is also widely viewed as a hedge against inflation and currency devaluation as it is not dependent on any particular issuer or government.
Central banks are the largest holders of gold. In their efforts to support their currencies during turbulent times, central banks tend to diversify their reserves and buy gold to improve the perceived strength of the economy and currency. High gold reserves can be a source of confidence in a country’s ability to pay. According to the World Gold Council, in 2022 central banks added 1,136 tonnes of gold worth around $70 billion to their reserves. This is the highest annual purchase on record. Central banks from emerging markets such as China, India and Turkey are rapidly increasing their gold reserves.
Gold has an inverse correlation with the U.S. dollar and U.S. Treasuries, both of which are important reserves and safe haven assets. When the dollar depreciates, the price of gold tends to rise, allowing investors and central banks to diversify their investments during turbulent times. Gold also has an inverse correlation with risky 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 can change based on a variety of factors. Geopolitical instability or fear of a severe recession can quickly drive up the price of gold due to its safe-haven status. As a non-yielding asset, gold tends to rise when interest rates are lower, while higher money costs usually weigh on the yellow metal. However, most of the moves depend on how the US dollar (USD) behaves, 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 drive gold prices higher.
