Gold Forecast: Sellers stay on the sidelines as $2,500 support holds

Gold regained its traction after dropping below $2,500 earlier in the week.
The near-term technical outlook suggests that sellers remain on the sidelines.
August Consumer Price Index (CPI) data from the US stand out in next week’s calendar.

After staying under modest bearish pressure in the first half of the week, Gold (XAU/USD) benefited from falling US Treasury bond yields and reclaimed $2,500. August inflation data from the US could fuel the next directional move in the precious metal.

Gold buyers continue to defend $2,500

Gold spent the first day of the week fluctuating in a tight range as trading conditions thinned out with the US financial markets remaining closed in observance of the Labor Day Holiday.

Wall Street’s main indexes declined sharply following the three-day weekend on Tuesday, allowing the US Dollar (USD) to gather strength and causing XAU/USD to drop below $2,500. On Wednesday, the USD came under selling pressure after the data published by the US Bureau of Labor Statistics (BLS) showed that the number of job openings on the last business day of July stood at 7.67 million, down from 7.9 million in June and below the market expectation of 8.1 million.

As Gold recovered back above the key $2,500 level early Thursday, technical sellers took action and helped the yellow metal extend its recovery. In the American session, the Automatic Data Processing (ADP) reported that employment in the private sector rose by 99,000 in August. This reading followed the 111,000 (revised from 122,000) increase recorded in July and missed the market expectation of 145,000 by a wide margin. The benchmark 10-year US Treasury bond yield dropped toward 3.7% and paved the way for another leg higher in XAU/USD.

On Friday, the BLS announced that Nonfarm Payrolls rose by 142,000 in August, falling short of the market forecast of 160,000. Additionally, July’s increase of 114,000 was revised down to 89,000. Other details of the jobs report showed that the Unemployment Rate edged lower to 4.2%, as expected. As the 10-year US extended its weekly decline and slumped below 3.7% after these readings, Gold held its ground heading into the weekend.

Gold investors await US inflation data

Trade Balance data from China could trigger a reaction in Gold during the Asian trading hours on Tuesday. In case China’s trade surplus widens noticeably in August, the immediate reaction could help Gold stretch higher because China is the world’s biggest consumer of Gold. On the flip side, investors could grow concerned about Gold’s demand outlook and cause the price to turn south in the near term if the trade surplus shrinks.

On Wednesday, August Consumer Price Index (CPI) data from the US will be watched closely by market participants. On a monthly basis, the CPI and the core CPI, which excludes volatile food and energy prices, are both forecast to rise 0.2%. In case the core CPI increases by 0.4% or more, US Treasury bond yields could rebound and cause Gold to lose its footing. On the flip side, a reading at or below the market forecast could make it difficult for the USD to attract investors and help XAU/USD push higher.

On Thursday, the European Central Bank (ECB) will announce monetary policy decisions. Although this event is unlikely to have a direct impact on Gold’s valuation, it could influence the USD’s valuation. A dovish ECB surprise could allow the USD to capture capital outflows out of the Euro and limit XAU/USD’s upside.

Assessing the current market positioning in Gold, “our read on positioning dynamics is now already at extreme levels that have historically marked significant turning points in Gold markets,” TD Securities Senior Commodity Strategist Daniel Ghali said in a report. “Macro fund positioning is now at levels only seen during the Brexit referendum in 2016, the ‘stealth QE’ narrative in 2019, or in the peak panic of the Covid-19 crisis in March 2020. This time around, physical markets have already fizzled out, whereas we also see extremes in Shanghai trader positions alongside CTA trend followers. Downside risks are more potent,” Ghali added.

Gold technical outlook

The bullish bias remains unchanged in the near term, with the Relative Strength Index (RSI) indicator on the daily chart holding near 60 and Gold trading within the upper half of the ascending regression channel coming from early March.

Immediate support is located at $2,500 (20-day Simple Moving Average (SMA), mid-point of the ascending regression channel). If Gold falls below this level and confirms it as resistance, $2,440 (50-day SMA) could be seen as the next support before $2,400 (lower limit of the ascending channel.

On the upside, the first resistance is located at $2,530 (static level). Once Gold clears this hurdle, it could target the upper limit of the ascending channel at $2,600.

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

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