- Gold is reversing 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 U.S. economic data keeps Fed rate cut speculation alive.
Gold prices reversed on Friday, falling more than 1.70%. Economic data from the United States (US) fueled investor reaction to appreciation of a smaller interest rate cut by the Federal Reserve (Fed) due to the solid state of the economy. XAU/USD is trading at $2,317, below its opening price after hitting a daily high of $2,368.
The US economy continued to give mixed signals about its robustness. S&P Global revealed June’s Purchasing Managers’ Index (PMI) readings, which beat estimates and outperformed May’s data. However, the US housing sector continued to deteriorate after Existing Home Sales missed the mark in May and fell from April’s figures.
After the PMI release, investors abandoned gold and bought the greenback, which rose 0.14% to 105.80, according to the US Dollar Index (DXY).
US data released during the week highlighted the uncertainty as some economic indicators reiterated that the economy is still solid. On the plus side, industrial production, the S&P Flash PMI and retail sales rose, although retail sales were lower than the previous month.
Conversely, housing continued to deteriorate, while the labor market, as measured by Americans filing jobless claims, fared worse than expected. The data kept investors’ chances of a September Fed rate cut alive.
Given this situation, gold prices continued to decline along with technical indicators, indicating a correction after a three-month rally that began in March and lifted XAU/USD to its all-time high of $2,450.
The CME FedWatch Tool puts the odds of a 25 basis point Fed rate cut in September at 59.5%, up from 57.5% on Thursday. Meanwhile, the December 2024 Fed rate futures contract suggests the Fed will cut by 36 basis points by the end of the year.
Daily overview of market movements: Gold price falls due to strong US dollar
- US Treasury yields are firm, with the 10-year Treasury yield stagnating at 4.261%.
- 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 from 54.8 to 55.1, beating the forecast of 53.7.
- US existing home sales were weaker than expected in May, falling to 4.11 million from 4.14 million in April, a -0.7% decline.
- Fed officials advised patience on interest rate cuts, stressing that their decisions will remain data-driven. Despite last week’s upbeat CPI report, policymakers reiterated that more May-like data is needed before any changes are considered.
- Despite the US CPI report showing that the process of disinflation continues, Fed Chairman Jerome Powell noted that they remain “less convinced” about inflation developments.
Technical Analysis: Gold price drops below Head-and-Shoulders, eyes $2,300
Gold’s downtrend resumed on Friday after buyers tested the Head-and-Shoulders pattern and pulled the XAU/USD price above the neckline of the pattern. Despite reaching a daily close above the latter, sellers bucked the trend and pushed the spot price to a new three-day low of $2,316.
This means that the path of least resistance is downward. Another boost would be $2,300. After clearing, XAU/USD would drop to $2,277, the May 3 low, followed by the March 21 high of $2,222. Further losses lie below, with sellers eyeing the $2,170-$2,160 Head-and-Shoulders chart target pattern.
Conversely, if gold regains $2,350, it will expose other key resistance levels, such as the June 7 high of $2,387, before challenging $2,400.
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. Nowadays, the precious metal, apart from its luster and use for jewelry, 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 currency depreciation because it does not rely on any particular issuer or government.
Central banks are the largest holders of gold. In their aim to support their currencies in 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 for a country’s solvency. Central banks added 1,136 tons of gold to their reserves in 2022, worth about $70 billion, 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 Treasuries, which are major reserves and safe-haven assets. When the dollar weakens, gold tends to rise, allowing investors and central banks to diversify their assets during turbulent times. Gold is also inversely correlated with risk assets. Stock market rallies tend to weaken the price of gold, while sell-offs in riskier markets tend to favor the precious metal.
The price can fluctuate due to a wide variety of factors. Geopolitical instability or fears of a deep recession can quickly escalate the price of gold due to its safe-haven status. As a lower-yielding asset, gold tends to rise with lower interest rates, while the higher cost of money typically weighs on the yellow metal. Still, most moves depend on how the US dollar (USD) behaves when 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 gold prices up.