Gold stumbles amid surge in US Treasury yields, rises over 2% monthly
- Gold falls below $2,500 following US PCE report, boosting likelihood of September Fed rate cut.
- Fed's cautious policy easing strategy stirs uncertainty; markets favor a 25 bps cut.
- Traders' bets on a 25 bps rate cut rise to 69%; odds for a 50 bps reduction fall to 31%, per CME FedWatch Tool.
Gold prices tumbled over 0.90% on Friday, below the $2,500 figure for the second day in the week after a report from the US Department of Commerce revealed that inflation continues to edge lower, according to July’s core Personal Consumption Expenditures Price Index (PCE). At the time of writing, the XAU/USD trades at $2,497 after hitting a high of $2,526.
Data from the US Bureau of Economic Analysis (BEA) showed that the Federal Reserve’s (Fed) favorite inflation gauge, the core PCE, came slightly below estimates though it matched June’s report. The data supports the Fed’s intentions to begin easing monetary policy as soon as the upcoming September meeting, though uncertainty lies in the size of the first interest rate cut.
Even though Fed policymakers adopted a “gradualism” stance, investors speculate that they could cut as high as 50 basis points (bps), according to the CME FedWatch Tool data. Nevertheless, next Friday's US Nonfarm Payrolls report will be crucial following Fed Chair Jerome Powell’s statement that employment risks are tilted to the upside.
After the US PCE report, traders raised bets of a 25 bps rate cut by the Fed at the September meeting, with odds at 69%, while the chances for a 50 bps cut came down to 31%.
Bullion prices are headed for a 2% gain in August after Gold hit an all-time high of $2,531 on August 20.
Ahead of the next week, the US economic docket will be busy, with the release of ISM Manufacturing and Services PMIs, jobs data and the Balance of Trade.
Daily digest market movers: Gold price retreats as traders trim 50-bps rate cut odds
- December 2024 Chicago Board of Trade (CBOT) fed funds future rates contract hints that investors are eyeing 97 basis points of Fed easing this year.
- US core PCE reading for July showed that prices increased by 2.6% YoY, unchanged from the previous month but slightly below the 2.7% YoY estimate. The headline PCE came in at 2.5% YoY, underperforming the forecast of a 2.6% rise.
- Consumer spending rose while income growth was sluggish, raising concerns about whether Americans can maintain their current spending pace.
- According to the University of Michigan (UoM), US Consumer Sentiment increased from 66.4 in July to 67.9 in August.
- Inflation expectations for one year dipped from 2.9% to 2.8%, while medium-term expectations — over five years — remained steady at 3%.
Technical outlook: Gold price rally halts, retreats below $2,500
Gold price remains upwardly biased despite dipping below $2,500, but a ‘bearish engulfing’ chart pattern looms. The Relative Strength Index (RSI) shows that sellers are in charge in the short term despite showing mixed readings as the RSI edges down but is in bullish territory.
If XAU/USD achieves a daily close below $2,500, the next support would be the August 22 low at $2,470. Once surpassed, the next stop would be the confluence of the August 15 swing low and the 50-day Simple Moving Average (SMA) at $2,431.
Conversely, if XAU/USD stays above $2,500, the next resistance would be the ATH, and the following resistance would be the $2,550 mark. A breach of the latter will expose $2,600.
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.
Author
Christian Borjon Valencia
FXStreet
Markets analyst, news editor, and trading instructor with over 14 years of experience across FX, commodities, US equity indices, and global macro markets.
