Gold price falls due to lower demand for safe investments and better US data

• Gold prices are falling due to easing hostilities in the Middle East and better-than-expected US economic data.
• Durable goods orders in the US beat forecasts on Monday, dispelling some of the pessimism about the US economy.
• Despite the risk of a correction due to overweight long positions, TD Securities expects the gold price to reach its long-term target of $2,700.

Gold (XAU/USD) is trading marginally lower at $2,510 on Tuesday as tensions in the Middle East ease and demand for the yellow metal as a safe haven falls. This comes after the missile war between Israel and Hezbollah failed to escalate despite continued threats from Iran.

Gold prices may also fall slightly following the release of better-than-expected US durable goods orders data on Monday. July’s 9.9% increase was the highest since May 2020 and helped to dispel some pessimism about the US economy. This, in turn, likely acted as an antidote to expectations that the Federal Reserve (Fed) will have to cut interest rates sharply to avoid a hard landing.

A more gradual tapering program would limit the upside in gold, as it is a non-interest-bearing asset and tends to look more attractive the lower interest rates are.

The probability that the Fed will cut its key interest rate by 0.50 percent in September instead of the usual 0.25 percent has fallen back below 30 percent. It had risen to around 35 percent after the chairman of the US Federal Reserve (Fed), Jerome Powell, gave the clearest signal yet of planned interest rate cuts in his speech in Jackson Hole on Friday.

Gold price falls due to lower demand for safe investments and strong US data

Gold prices fell slightly on Tuesday as demand for security goods eased. US Air Force General CQ Brown, chairman of the Joint Chiefs of Staff, said early Tuesday that fears of an imminent major Middle East conflict between Israel and Lebanon’s Hezbollah had eased since there had been no escalation. Nevertheless, the US general warned that “Iran still poses a significant threat as it considers an attack on Israel,” according to Reuters.

The US Dollar Index (DXY), which measures the dollar’s strength against a trade-weighted basket, has come off its lows, recovering marginally to 100.88 on Tuesday. Gold is negatively correlated with the US dollar (USD) as it is traded in USD.

Gold price likely to rise in the medium term, but risk of correction looms – TD Securities

According to Bart Melek, head of commodity strategy at TD Securities, the price of gold is likely to continue to rise, but there is also a risk of a sharp decline due to extreme long positioning.

“Further upside potential is to be expected in the coming months, but the funds’ strong long positioning entails a short-term correction risk,” says the strategist.

As the Fed now focuses more on its other mandate of maintaining “full employment,” there is a risk that strong employment numbers could trigger an unwinding of these long positions and a correction.

“A stronger-than-expected payroll or other event that dampens expectations for rate cuts could prompt these players to take profits, causing a significant correction,” Malek adds.

TD Securities’ long-term upside target for gold is $2,700, with the potential for major central banks like the People’s Bank of China (PBoC) to provide the demand that drives the precious metal’s price to these highs.

One possibility could be that the PBoC (and other large investors), who stopped buying gold back in May – presumably in the hope that prices would fall back to cheaper levels – may decide not to wait any longer and start buying again at current levels for fear of missing out, Malek adds.

Technical Analysis: Gold consolidates above the top of the previous range

Gold (XAU/USD) continues to trade above the support line of its old range. Despite the recent sideways trend, the pair remains in a short-term uptrend and given that “the trend is your friend,” this continues to favor longs over shorts.

XAU/USD 4-hour chart

The breakout from the range that looks like an incomplete triangle pattern on August 14 created an upside target at around $2,550. This was calculated by taking the 0.618 Fibonacci ratio of the range’s height and extrapolating it upwards. This target is the minimum expectation for continuation after a breakout based on the principles of technical analysis.

A break above the August 20 all-time high of $2,531 would provide additional confirmation of a further increase towards the $2,550 target.

Alternatively, a decline within the range would negate the projected upside objective. Such a move would be confirmed by a close below $2,470 (August 22 low). This would change the picture for gold and call into question the short-term uptrend.

However, gold is showing a broad upward trend in the medium and long term, which further supports the overall optimistic forecast for the precious metal.