- Gold bounces off the psychologically important $2,300 level after a fresh selling phase.
- The pair remains under pressure from the longer-term outlook for interest rates – data from Friday could be key.
- XAU/USD is approaching the neckline for a possible top pattern. If this is broken, it could lead to a downward cascade.
Gold (XAU/USD) is rising and trading around $2,320 on Thursday. Long-term global factors are supporting the yellow metal’s recovery. This comes after a period of pressure following comments from Federal Reserve (Fed) officials – those charged with setting interest rates in the US – who have consistently stated that more progress must be made in reducing inflation before they can consider cutting interest rates.
Their reluctance to cut interest rates weighs on gold as it makes non-interest paying assets relatively less attractive to investors.
Gold under pressure from reluctant Fed
Gold rebounded Thursday after another big day of decline on Wednesday, as markets reacted to a mix of Fed speakers taking a cautious stance on cutting interest rates.
Critical going forward will be Friday’s release of the US Personal Consumption Expenditures (PCE) price index for May, the Federal Reserve’s (Fed) inflation gauge of choice. A lower-than-expected outcome could make the Fed more likely to cut rates. The opposite would be the case if the PCE exceeds expectations.
While the Fed is standing still, the market is more optimistic given the relatively high probability (62%) that the Fed will cut rates at (or before) its September Fed meeting, although that is down from 66% on Wednesday. The estimates are based on the CME FedWatch tool, which calculates probabilities based on fed funds futures prices.
Gold’s downside is limited by longer-term factors
Gold is supported by several positive long-term factors. First, there is the country’s role as a safe haven in an increasingly fragmented, uncertain world. Geopolitical uncertainty in the Middle East, Ukraine and now France ahead of controversial elections is making some investors nervous, as is the impact of AI-driven revolutionary economic changes and the threat of climate change.
The US dollar (USD) is another double-edged factor. A strong US dollar has recently led to such a sharp depreciation of mainly Asian currencies, prompting regional central banks to hoard gold as a hedge against the effects. That said, a stronger dollar also tends to lower the price of gold precisely because it is priced in dollars.
The USD recently reached a 38-year high against the Japanese Yen (JPY) and the higher this rate goes, the more demand we will see for gold as a currency hedge.
Another longer-term positive for gold is the BRICS trade confederation’s strategy to use gold as a substitute for the US dollar in global trade. Given its position as a stable, secure store of value, gold is the most reliable alternative as a medium of exchange between countries with different, often volatile currencies.
Technical Analysis: Gold continues to approach key support
Gold has been steadily declining towards key support and the neckline of a potential top pattern at $2,279. A break below the neckline would signal a strong downward move.
XAU/USD daily chart
The XAU/USD pair has formed a bearish Head-and-Shoulders (H&S) pattern for the past three months. However, the upward breakout on June 20 has called into question the validity of the pattern. That said, a more complex topping pattern may still be forming that could still prove bearish.
If so, a break below the pattern neckline – even if not orthodox H&S – at $2,279 would confirm a reversal lower, with a conservative target at $2,171, and a second target at $2,105.
At the same time, it is also still possible that gold can find its feet and continue to climb higher. Gold’s original break above the trendline and 50-day SMA on June 20 would hit an initial, conservative target in the mid-$2,380s (June 7 high), and it’s still possible it could hit that target despite the pullback .
However, a break above $2,350 would be needed to confirm a move towards the June 7 high. A further break above could indicate a continuation towards the all-time high in May at $2,450.
A break above would confirm a resumption of the broader uptrend.
There is a risk that the trend is now sideways, both in the short and medium term. In the long term, gold remains in an uptrend.
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 medium of exchange. Currently, aside from its luster and use for jewelry, the precious metal is widely seen as a safe haven, meaning it is considered a good investment in turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies because it is not dependent on a specific 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 the currency. High gold reserves can be a source of confidence in a country’s solvency. Central banks added 1,136 tons of gold worth about $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest annual purchase since records began. Central banks in emerging economies such as China, India and Turkey are rapidly increasing their gold reserves.
Gold has an inverse correlation with the US dollar and US government bonds, which are both important reserves and safe havens. When the dollar depreciates, gold tends to rise, allowing investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risky assets. A stock market rally tends to weaken gold prices, while selloffs in riskier markets tend to favor the precious metal.
The price may change due to a wide range of factors. Geopolitical instability or the fear of a deep recession could quickly escalate gold prices due to its safe haven status. Being a yield-less asset, gold tends to rise at lower interest rates, while higher monetary costs usually weigh on the yellow metal. Still, most movements 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 in check, while a weaker dollar is likely to push up the price of gold.