Gold price plunges as risk appetite returns and Fed rate cut hopes mount

July 8, 2024 10:12 pm

  • Gold stumbles after peaking at $2,391 amid revived risk appetite.
  • Mixed US jobs data fuel speculation of an imminent Federal Reserve rate cut.
  • China’s PBoC halts Gold purchases, impacting bullion prices alongside falling Treasury yields.

The Gold price made a U-turn on Monday, trimming some of last Friday’s gains and tanking more than 1% as risk appetite returned. US equities posted gains, while US Treasury bond yields edged lower. The XAU/USD trades at $2,358 after hitting a daily high of $2,391.

Last week’s US NFP report was mixed. June figures exceeded estimates, but April’s and May’s downward revisions hinted that the US jobs market is cooling sharply. Consequently, the US Unemployment Rate ticked higher, spurring speculation that the Federal Reserve (Fed) could slash interest rates sooner than expected.

Bullion prices were also hurt by the People Bank of China’s (PBoC) decision not to buy Gold in June, as in May. China held 72.80 million troy ounces of the precious metal at the end of June.

The US 10-year Treasury bond yield fell almost two basis points to 4.27%, reflecting that market players expect the Fed to lower borrowing costs amid the chances of hurting the labor market.

According to data from the CME FedWatch Tool, investors are pricing in 73% odds of a Fed rate cut in September, up from 71% last Friday.

The US economic docket will feature Fed Chairman Jerome Powell’s semi-annual Congressional Testimony and the release of inflation figures on the consumer and producer sides. Initial Jobless Claims and the University of Michigan Consumer Sentiment will also complement the schedule.

Daily digest market movers: Gold price slumps ahead of Fed’s Powell speech

  • US CPI is expected to decrease from 3.3% to 3.1% YoY in June, while core inflation is projected to remain steady at 3.4% YoY.
  • According to the consensus, Initial Jobless Claims for the week ending July 6 are expected to increase from 238K to 240K.
  • July Consumer Sentiment is set to improve to 68.5, up from 68.2 in June, according to the consensus.
  • Federal Open Market Committee (FOMC) June Meeting Minutes showed that most participants estimated that the current policy is restrictive but had opened the door for rate increases. Policymakers acknowledged the economy is cooling and could react to unexpected economic weakness.
  • December 2024 fed funds rate futures contract implies that the Fed will ease policy by 39 basis points (bps) toward the end of the year.

Technical analysis: Gold price retreats below Head-and-Shoulders neckline

Gold price has retreated after decisively breaking the Head-and-Shoulders neckline, which witnessed the XAU/USD price travel to $2,392 before slumping toward $2,357, the current exchange rate, opening the door for a consolidation.

Momentum shows buyers are losing steam, with the Relative Strength Index (RSI) decelerating toward the 50-neutral line, which, if crossed, will hint that sellers are moving in.

If XAU/USD drops below $2,350, further declines could target the $2,300 level. If this support fails, the next demand zone would be the May 3 low of $2,277, followed by the March 21 high of $2,222.

On the other hand, if Gold prices climb above $2,400, further upside is seen, with the next resistance lying at the YTD high of $2,450, ahead of the $2,500 mark.

Gold FAQs

Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.

Central banks are the biggest Gold holders. 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 the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.

Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.

The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves 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 controlled, whereas a weaker Dollar is likely to push Gold prices up.

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