Gold slides on rising US yields as data portrays solid economy, delaying Fed rate cuts

  • Gold prices moves marginally lower, trading within $2,020-$2,024, reflecting cautious investor sentiment.
  • US employment strength and PMI figures support the Fed's inclination to maintain current rate levels.
  • Rising US Treasury yields indicate market skepticism about immediate Fed rate cuts, a tailwind for the US Dollar.

Gold price prints modest losses on Thursday after economic data from the United States portrays the US economy as solid based on strong employment figures. Business activity continues to expand despite cooling off from an earlier hot streak, while the Minutes of the latest Federal Reserve’s (Fed) monetary policy meeting signaled that policymakers are in no rush to slash rates. The XAU/USD trades within the $2,020-$2,024 area, down by 0.06%.

XAU/USD traders remain entertained by a busy economic docket in the US. The US Bureau of Labor Statistics (BLS) revealed that unemployment claims for the latest week dropped compared to the one ending on February 10. At the same time, S&P Global revealed mixed February Flash PMIs, which remained in expansionary territory, fortifying the case that the US Federal Reserve (Fed) should keep rates higher for longer.

In the meantime, US Treasury bond yields are rising on the short end of the curve, a signal that investors remain skeptical that the Fed would cut rates in the March or May meetings. The latest Federal Open Market Committee (FOMC) minutes emphasized the US central bank is highly committed to tackling inflation even though economic risks are skewed to the downside. Policymakers emphasized that they would decide to ease policy via a data-dependent approach.

The FOMC Minutes showed Fed officials remain hesitant to cut rates too soon, while adding they did not see it appropriate to lower interest rates until they gained “greater confidence” in core inflation moving sustainably toward 2%. Even though policymakers acknowledged that the risks of achieving both mandates is more balanced, they remained “highly attentive” to inflationary risks, even though economic risks are skewed to the downside.

Daily digest market movers: Gold retraces as traders see the Fed holding rates higher

  • US Initial Jobless Claims for the week ending February 17 fell by 12,000 to 201,000, coming in under the anticipated 218,000 and the prior week's figure of 213,000. This drop indicates a continued tightness in the labor market, which is generally interpreted as a potential factor that could drive inflation upward.
  • Business activity in the US moderated in February, as reported by S&P Global. Both the Services and Manufacturing Purchasing Managers Index (PMI) remained in the expansionary zone, indicating growth. However, the Services PMI recorded a figure of 51.3, falling short of both expectations and January's results, while the Manufacturing PMI rose to 51.5, surpassing forecasts and the previous month's 50.7. Consequently, the Composite Index, which aggregates the performance of both sectors, declined slightly from 52 to 51.4.
  • The CME FedWatch Tool sees traders expect the first 25 bps rate cut by the Fed in June 2024.
  • Investors are pricing in 95 basis points of easing throughout 2024.
  • The US Dollar Index, tracking the performance of the US Dollar against a basket of six major currencies, is currently trading at around 103.98, down 0.01%.
  • The Federal Reserve Vice-Chair Philip Jefferson said that he’s looking to a broad set of indicators, before deciding to cut interest rates. Despite disregarding giving a timetable of when the US central bank would begin to ease monetary conditions, he remains optimistic about the Fed bringing inflation toward its 2% target.

Technical analysis: Gold trades within familiar levels, capped by the 50 and 100-day SMA

Gold is trading sideways but is slightly tilted to the downside, capped by the 50-day Simple Moving Average (SMA) at $2,033.27. The non-yielding metal's failure to breach the 50-day SMA opened the door for a pullback, which could be extended toward the October 27 daily high-turned-support at $2,009.42.  A breach of the latter will expose the 100-day SMA at $2,002.05. The next stop would be the December 13 low at $1,973.13, followed by the 200-day SMA at $1,965.86.

On the flip side, if buyers lift the XAU/USD above the 50-day SMA, look for a challenge of the $2,050.00 figure. Upside risks lie at $2,065.60, the February 1 high.

Gold FAQs

Why do people invest in Gold?

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.

Who buys the most Gold?

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.

How is Gold correlated with other assets?

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.

What does the price of Gold depend on?

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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