- Gold prices recovered gains after hitting a daily high of $2,368, down over 1.70%.
- Strong US S&P Global PMI data boosts the US dollar, with the DXY up 0.14% to 105.80.
- Mixed US economic data keeps speculation about a Fed interest rate cut alive.
Gold prices reversed course on Friday, falling more than 1.70%. Economic data from the United States (US) spurred investors to price in fewer rate cuts by the Federal Reserve (Fed) due to the solid economic situation. The XAU/USD rate is trading at $2,317, down from its opening price after hitting a daily high of $2,368.
The US economy continued to send mixed signals about its resilience. S&P Global released the Purchasing Managers Index (PMI) for June, which beat estimates and exceeded May’s data. However, the US housing sector continued to deteriorate after existing home sales for May missed expectations and declined compared to April’s data.
Following the release of the PMI, investors sold gold and bought the greenback, which rose 0.14 percent to 105.80 according to the US dollar index (DXY).
US data released during the week underscores the uncertainty, with some economic indicators confirming that the economy is still solid. On a positive note, industrial production, S&P Flash PMIs and retail sales all increased, although the latter were lower than the previous month.
In contrast, the housing situation continued to deteriorate and the labor market, as measured by the number of jobless claims, performed worse than expected. The data did not dampen investors’ hopes that the Fed would cut interest rates in September.
Against this backdrop, gold prices continued to decline, with technical indicators pointing to a correction after a three-month rally that began in March and pushed XAU/USD to its all-time high of $2,450.
The CME FedWatch tool shows a 59.5% probability of a 25 basis point Fed rate cut in September, up from 57.5% on Thursday. Meanwhile, the December 2024 Fed Funds Rate Futures contract suggests the Fed will cut 36 basis points towards the end of the year.
Daily overview of market drivers: Gold price falls due to strong US dollar
- US Treasury yields are stable, with the 10-year Treasury yield unchanged at 4.261%.
- The S&P Global Manufacturing and Services Flash PMIs rose above estimates in June. The Manufacturing PMI rose to 51.7 from 51.3, beating the estimate of 51. The Services PMI rose to 55.1 from 54.8, beating the forecast of 53.7.
- US existing home sales were lower than expected in May, falling to 4.11 million from 4.14 million in April, a decline of -0.7%.
- Fed officials advised patience with regard to rate cuts and stressed that their decisions would continue to depend on the data. Despite last week’s positive consumer price index, policymakers reiterated that they need to see more data like those seen in May before considering any changes.
- Although the US Consumer Price Index (CPI) shows that the disinflation process is continuing, Fed Chairman Jerome Powell said they remain “less confident” about the direction of inflation.
Technical Analysis: Gold price falls below the head and shoulders line, targets $2,300
Gold’s downtrend continued on Friday after buyers tested the head and shoulders pattern and pushed the XAU/USD price above the pattern’s neckline. Although a daily close was made above this line, sellers defended the neckline and pushed the spot price to a new three-day low of $2,316.
However, the path of least resistance is to the downside. The next support would be at $2,300. Once reached, XAU/USD would drop to $2,277, the May 3 low, followed by the March 21 high at $2,222. Below this, further losses lie ahead, with sellers eyeing the head and shoulders chart pattern target of $2,170-2,160.
Conversely, a return of gold to the $2,350 mark would expose other key resistance levels, such as the June 7 cycle high at $2,387, before challenging the $2,400 mark.
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 luster and use as 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 stock market recovery 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.