Gold nears support levels amidst political uncertainty

• A potential second Trump presidency could create a more inflationary environment, increasing US Treasury bond yields and exerting downward pressure on gold prices.

• The People's Bank of China's unexpected rate cuts have improved global risk sentiment, reducing the attractiveness of safe-haven assets like gold.

• The Federal Reserve's anticipated rate cut and upcoming US economic data may support gold prices, making the outlook for gold more complex.

• Technical indicators suggest a bullish outlook for gold, with price corrections potentially offering buying opportunities for investors.

The gold market hit strong resistance and corrected lower towards the minor support area, where price fluctuations indicate a possible rebound. The ongoing economic and geopolitical tensions suggest that prices may remain heavily volatile, but the overall trend is likely to remain positive.

Impacts of US and China developments on Gold

The recent developments in the US and China have significant implications for the gold market. Investors reacted little to President Joe Biden's decision to end his re-election campaign, as the US equity market is expected to benefit from Trump's proposed policies. This shift in political dynamics could lead to a more inflationary environment under a potential second Trump presidency, pushing US Treasury bond yields higher. Higher yields often attract investors away from non-yielding assets like gold, contributing to downward pressure on gold prices. Additionally, the People's Bank of China's (PBoC) unexpected rate cuts have bolstered global risk sentiment, diminishing the appeal of safe-haven assets.

However, the outlook for gold is not entirely bearish. The Federal Reserve's anticipated rate cut in September keeps the US Dollar bulls on the defensive, lending some support to gold prices. A weaker dollar makes gold more attractive to foreign investors. Moreover, upcoming US economic data, including Existing Home Sales and the Richmond Manufacturing Index, the US Q2 GDP print and the US Personal Consumption Expenditures (PCE) Price Index, will provide critical insights into the health of the US economy and influence market sentiment. Flash PMIs released this week will also offer clues about the global economic outlook, potentially providing further impetus for gold prices. Investors will closely monitor these data points for short-term trading opportunities and gauge the gold market's longer-term trajectory.

Gold nearing key support levels

The chart below shows that the price correction started from the resistance points and is approaching the first minor support region of $2385. The technical outlook remains strongly bullish. This indicates a price consolidation around this level and the possibility of a rebound. The double bottom formation seen by the blue arcs suggests that the price may fluctuate here. If this support level is broken, prices could drop to a lower level of support where a bottom is likely to form.

Despite the strong market drop last week and the emergence of a weekly bearish hammer, the overall market remains bullish. This bullish outlook is also validated by the ratio of senior gold miners to the US stock market, which shows a bottom and looks poised to rally. This ratio indicates that the bottom in the gold market in 2024 is similar to the bottom in 2015 when the gold market rallied higher, along with the ratio. Therefore, any price correction in gold prices indicates a buying opportunity for investors.

Bottom line

In conclusion, recent political and economic developments in the US and China have introduced some bearish factors for the gold market. These include a potentially more inflationary environment under a second Trump presidency and increased global risk sentiment due to China's rate cuts. The anticipated Federal Reserve rate cut and supportive technical indicators suggest potential support for gold prices. As investors navigate through upcoming US economic data and global economic health indicators, the interplay between these factors will continue to shape gold's trajectory, presenting both challenges and opportunities for investors. The correction in gold is considered a strong buying opportunity for traders and investors.

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