- Gold reverses gains after hitting a daily high of $2,368, down more than 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 alive about Fed rate cuts.
The gold price reversed course on Friday and fell more than 1.70%. Economic data from the United States (US) boosted investor reaction to the Federal Reserve (Fed) pricing in fewer interest rate cuts due to the solid state of the economy. The XAU/USD is trading at $2,317, below its opening price after hitting a daily high of $2,368.
The US economy continued to send mixed signals about its robustness. S&P Global announced June Purchasing Managers Index (PMI) figures, which exceeded expectations and exceeded May figures. However, the US housing sector continued to deteriorate after existing home sales missed the mark in May and fell from April figures.
When the PMI was released, investors ditched gold and bought the greenback, which rose 0.14% to 105.80, according to the US Dollar Index (DXY).
US data revealed this week highlights the uncertainty as some economic indicators reiterate that the economy remains solid. On the plus side, industrial production, S&P Flash PMIs and retail sales rose, although the latter were lower than the previous month.
Conversely, housing continued to deteriorate while the labor market, as measured by Americans filing unemployment claims, performed worse than expected. The data kept investors’ chances of a Fed rate cut alive in September.
Against the backdrop, gold prices continued to decline along with technical indicators, pointing to a correction after a three-month rally that started in March and took XAU/USD to its all-time high at $2,450.
The CME FedWatch Tool shows the odds for a 25 basis point Fed rate cut in September at 59.5%, up from 57.5% on Thursday. Meanwhile, the December 2024 Fed Funds rate futures contract implies that the Fed will cut by 36 basis points by the end of the year.
Daily market movements: Gold price falls due to strong US dollar
- US government bond yields are firm, with the ten-year government bond yield remaining stable at 4.261%.
- S&P Global Manufacturing and Services Flash PMIs rose above expectations in June. The manufacturing PMI rose from 51.3 to 51.7, beating the estimate of 51. The services PMI rose from 54.8 to 55.1, beating the forecast of 53.7.
- Sales of existing homes in the US were lower than expected in May, falling to 4.11 million from 4.14 million in April, a contraction of -0.7%.
- Fed officials advised patience on rate cuts and emphasized that their decisions would remain data-driven. Despite last week’s positive CPI report, policymakers reiterated the need to see more data comparable to May before considering any changes.
- Despite the US CPI report showing that the disinflation process continues, Fed Chairman Jerome Powell noted that they have “less confidence” in progress on inflation.
Technical Analysis: Gold Price Drops Below the Head-and-Shoulders Neckline, Aiming at $2,300
Gold’s downtrend resumed on Friday after buyers tested the Head-and-Shoulders pattern, dragging the XAU/USD price above the pattern’s neckline. Despite reaching a daily close above the latter, sellers defended the neckline and pushed the spot price to a new three-day low of $2,316.
That said, the path of least resistance is downward. The next support would be $2,300. Once cleared, XAU/USD would fall to $2,277, the May 3 low, followed by the March 21 high of $2,222. Further losses lie below, with sellers eyeing the Head-and-Shoulders chart pattern target from $2,170 to $2,160.
Conversely, if Gold reclaims $2,350, it will expose additional key resistance levels, such as the June 7 cycle high of $2,387, before calling the $2,400 figure into question.
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 gold owners. In their goal to support their currencies in turbulent times, central banks tend to diversify their reserves and purchase gold to improve the perceived strength of the economy and the currency. High gold reserves can be a source of confidence for 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 from 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.