- The price of gold is rising slightly, moving away from the weekly low reached on Thursday.
- The Fed’s dovish expectations are leading to renewed USD selling and continue to provide tailwind.
- Geopolitical risks continue to provide tailwind ahead of Fed Chairman Jerome Powell’s speech.
Gold prices (XAU/USD) fell more than 1% on Thursday as bulls decided to take some profits amid a good recovery in US Treasury yields and the US dollar (USD). However, the downside remains cushioned as there is increasing acceptance that the Federal Reserve (Fed) will start cutting borrowing costs in September. The bets were confirmed by rather unimpressive US macro data that pointed to a slowdown in the labor market and suggested that the economy is at risk of a slowdown. This is dampening investors’ appetite for riskier assets and providing support to the safe-haven precious metal.
Apart from that, worries about a major conflict in the Middle East helped gold prices attract some buyers during the Asian session on Friday. However, XAU/USD remains below the psychological $2,500 mark as traders now seem to be hesitant and prefer to wait until Fed Chair Jerome Powell speaks at the Jackson Hole Symposium later on Friday. Powell’s remarks will be closely watched for fresh clues on the Fed’s rate cut path. Apart from that, geopolitical developments will play a key role in influencing XAU/USD and determining the short-term trajectory.
Daily Market Action Overview: Gold price attracts new buyers amid dovish Fed expectations and renewed USD selling
- The US dollar recovered quite well from its 2024 low reached the previous day amid rising US Treasury yields, leading to capital flows away from gold on Thursday.
- The USD recovery attempt lacks the necessary consistency amid speculation about an imminent start of the US Federal Reserve’s rate-cutting cycle in September, which is helping to limit the XAU/USD pair’s losses.
- In economic data, the U.S. Department of Labor (DoL) reported that initial jobless claims rose to a seasonally adjusted 232,000 in the week ended August 17, up from 228,000 in the previous month.
- This followed the release of the annual benchmark review of employment data on Wednesday, which showed that U.S. employers created 818,000 fewer jobs than reported during the year through March.
- In addition, the minutes of the FOMC meeting on July 30 and 31 show that, given the progress made in reducing inflation, more policymakers are calling for a rate cut next month.
- The S&P Global Flash PMI suggested that business activity in the U.S. manufacturing sector fell the most this year, while the services sector indicator unexpectedly rose.
- The composite PMI showed that private sector business activity in the US continued to expand at a healthy pace and selling price inflation fell to levels close to the pre-pandemic average.
- Jeffrey Schmid, president of the Kansas City Fed, said there is still a lot of work to do to bring inflation back to 2 percent on a sustainable basis and he needs to see more data before he can support the decision to cut interest rates.
- Philadelphia Fed President Patrick Harker said the labor market revisions were no surprise and he was comfortable with a rate cut in September as long as the data were in line with expectations.
- Susan Collins, President of the Boston Fed, also stated that it would soon be appropriate to begin cutting interest rates as inflation data suggested that inflation would return to the two percent mark.
- Market attention is now turning to Fed Chairman Jerome Powell’s speech, which will be watched for clues about interest rate developments and will give new impetus to the yellow metal.
Technical Analysis: Gold price could accelerate the corrective slide once the crucial support of $2,470 is decisively broken
From a technical perspective, the overnight decline stalled near the $2,370 horizontal resistance point, which is now acting as support and should now act as a key turning point. A convincing break below it could result in technical selling and pull gold prices towards the next relevant support in the $2,345-2,343 region. The corrective decline could extend further towards the 50-day SMA (Simple Moving Average), which is currently just above the round $2,400 mark.
On the downside, the momentum above the $2,500 level now seems to be facing resistance near the $2,513-$2,514 area. This is followed by the record high in the $2,531-$2,532 region, which if overcome will be seen as a new trigger for bullish traders and set the stage for a continuation of the recently well-established uptrend in gold prices.
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.
