On Friday, gold prices took a nosedive by over 0.90%, falling below the $2,500 mark for the second time this week. This drop came after the US Department of Commerce released a report showing a decrease in inflation, as indicated by July’s core Personal Consumption Expenditures Price Index (PCE). Currently, the XAU/USD pair is trading at $2,497 after reaching a peak of $2,526.
The Federal Reserve’s preferred inflation gauge, the core PCE, slightly missed expectations but aligned with the previous month’s data, hinting at the Fed’s plan to start easing monetary policy at the upcoming September meeting. However, the uncertainty lies in the magnitude of the initial interest rate cut.
While Fed policymakers are leaning towards a gradual approach, investors are speculating on the possibility of a 50 basis point (bps) cut, according to data from the CME FedWatch Tool. The upcoming US Nonfarm Payrolls report will play a crucial role in determining the Fed’s decision, especially after Fed Chair Jerome Powell’s statement regarding employment risks.
Following the US PCE report, traders have increased their bets on a 25 bps rate cut in September, with the odds currently at 69%, while the chances of a 50 bps cut have decreased to 31%.
Despite the recent decline, gold prices are set to record a 2% gain in August after reaching an all-time high of $2,531 on August 20. Looking ahead, the US economic calendar for the upcoming week includes key releases such as ISM Manufacturing and Services PMIs, jobs data, and the Balance of Trade.
Insights into Market Trends: Gold Price Correction as Traders Adjust Rate Cut Expectations
- December 2024 Chicago Board of Trade (CBOT) fed funds future rates contract suggests a potential 97 bps of Fed easing in the current year.
- The US core PCE reading for July revealed a 2.6% year-on-year increase in prices, in line with the previous month but slightly below the estimated 2.7% YoY. The headline PCE stood at 2.5% YoY, falling short of the projected 2.6% rise.
- While consumer spending saw growth, income growth remained sluggish, raising concerns about the sustainability of spending patterns among Americans.
- US Consumer Sentiment, as reported by the University of Michigan (UoM), climbed from 66.4 in July to 67.9 in August.
- Inflation expectations for the next year dipped from 2.9% to 2.8%, while medium-term expectations (over five years) remained steady at 3%.
Technical Analysis: Gold Price Rally Pauses, Dips Below $2,500
Despite a temporary dip below $2,500, gold prices maintain an upward bias, with a ‘bearish engulfing’ chart pattern on the horizon. The Relative Strength Index (RSI) indicates short-term selling pressure, albeit showing mixed signals as the RSI declines while remaining in bullish territory.
If XAU/USD closes below $2,500, the next support level would be at the August 22 low of $2,470. Further downside could target the confluence of the August 15 swing low and the 50-day Simple Moving Average (SMA) at $2,431.
On the upside, if XAU/USD stays above $2,500, the next resistance stands at the all-time high, followed by the $2,550 mark. A breakthrough above $2,550 could pave the way for a test of $2,600.
Understanding Gold: FAQs for Investors
Gold FAQs
Gold has historically served as a store of value and medium of exchange, with its current status as a safe-haven asset during turbulent times. It is also considered a hedge against inflation and currency depreciation due to its independent nature.
Central banks hold significant amounts of gold to bolster their currency reserves and enhance economic stability. Emerging economies like China, India, and Turkey are actively increasing their gold reserves for added security.
Gold exhibits an inverse relationship with the US Dollar and US Treasuries, making it an attractive asset during times of dollar depreciation and market uncertainty.
Gold prices are influenced by various factors, including geopolitical events, economic indicators, and currency movements. Its value tends to rise in times of crisis and lower interest rates, while a strong US Dollar can limit its growth potential.