Gold reclaims $2,500 handle as interest rates still expected to fall long term
|- Gold finds support from former range highs and bounces ahead of speech from Fed Chairman Jerome Powell.
- The speech could solar the outlook for Fed policy on interest rates, a key driver for Gold.
- Technically, XAU/USD lifts off support and remains in an uptrend, though risks of a near-term reversal have increased.
Gold (XAU/USD) reclaims the $2,500 handle on Friday after bouncing off technical support at $2,470. The precious metal’s recovery is aided by a weaker US Dollar (USD) – to which it is negatively correlated – and lower US Treasury yields of a longer majority (US 3-month Note yields are actually slightly higher at the time of publication), which indicate the market expects interest rates to fall in the future – a plus for Gold as it is a non-interest paying asset.
The overall outlook remains positive for Gold ahead of the key event for the day – the speech of the Chairman of the Federal Reserve (Fed), Jerome Powell, at the central banker symposium in Jackson Hole. Powell is expected to confirm market expectations that the Fed will cut interest rate cuts at its September 18 meeting.
Gold broadly supported by negative US data
Gold trades up over half of a percent after shedding over 1.0% on Thursday. Gold’s decline of the previous day was helped by a fall in the probability that the Fed will cut interest rates by a bumper 0.50% in September. From a chance of mid-30% the probability has fallen to mid-20% overnight, according to the CME FedWatch tool. Mixed Purchasing Manager Survey (PMI) data and Jobless Claims on Thursday, as well as recent prudent commentary from some Fed officials, could have been a factor in the recalibration.
Preliminary S&P Global Composite Purchasing Manager Index (PMI) data for August – which gauges activity levels in key industry sectors – fell to 54.1 from 54.3 in July, although this was not as much as the decline to 53.5 that economists had expected.
US Manufacturing PMI fell to 48.0 from 49.6 when no-change had been expected. Services, meanwhile, rose to 55.2 from 55.0, when a decline to 54.0 had been forecast.
Jobless Claims were mixed, with Initial Jobless Claims rising to 232K – slightly above the previous upwardly-revised 228K, and estimates of 230K – but Continuing Claims marginally lower than expected, though higher than previously.
Technical Analysis: Gold pulls back to top of old range and bounces
Gold (XAU/USD) uses support at the top of its old range as a launchpad for a recovery on Friday. Despite recent weakness, the short-term trend remains bullish. Given “the trend is your friend” this continues to favor longs over shorts.
XAU/USD Daily Chart
The breakout of the range on August 14 generated an upside target at roughly $2,550, calculated by taking the 0.618 Fibonacci ratio of the range’s height and extrapolating it higher. This target is the minimum expectation for a follow-through after a breakout based on principles of technical analysis.
A break back inside the range, however, could negate the upside projected target. Such a move would be confirmed on a close below $2,470 (August 22 low). It would change the picture for Gold and bring the short-term uptrend into doubt.
Gold is in a broad uptrend on medium and long-term time frames, however, which further supports an overall bullish outlook for the precious metal.
Gold FAQs
Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.
Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.
Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling 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 Gold price, while sell-offs in riskier markets tend to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.
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