- Gold prices continue to find support from a US dollar selling bias due to the dovish Fed stance.
- Concerns over a U.S. economic recession are further pushing down the price of safe-haven gold.
- Traders are being cautious ahead of the release of key U.S. employment data.
Gold prices (XAU/USD) surged Thursday, approaching the $2,524-2,525 supply zone amid continued US dollar (USD) selling on expectations that the US Federal Reserve (Fed) will make a significant interest rate cut later this month. Mixed employment data from the US this week suggested the labour market was losing steam, raising concerns about the health of the economy. This raised market expectations of possible more aggressive policy easing from the Fed, which pulled the US dollar back from a two-week high reached on Tuesday, benefiting low-yielding gold.
Meanwhile, renewed concerns over a slowdown in the world's largest economy have dampened investors' appetite for risk assets. This, along with continuing geopolitical tensions, has proven to be another factor underpinning demand for safe-haven gold prices. However, XAU/USD remains below the all-time high recorded in August as traders opt to wait for the closely watched US monthly employment report due to be released later this Friday. The well-known Non-Farm Payrolls (NFP) report will be closely watched for hints on the path of the Fed's interest rate cuts, which could in turn provide a new directional impetus for the precious metal.
Daily Digest Market Movers: Gold prices benefit from expectations of big Fed interest rate cut in September
- U.S. private sector employment increased by 99,000 jobs in August, the smallest increase since January 2021, according to the ADP national employment report released Thursday.
- This figure was well below market expectations of 145,000, and the previous month's figure was also revised downward from an initial estimate of 122,000 to 111,000.
- Earlier on Wednesday, job openings in July fell to 7.673 million, the lowest level in three and a half years, providing further evidence of the deteriorating labor market.
- The Institute for Supply Management's (ISM) services sector PMI rose slightly to 51.5 from 51.4 in August, while the payments price index rose to 57.3 from 57 and the employment index fell to 50.2 from 51.1.
- Meanwhile, the US Department of Labor (DoL) reported a larger-than-expected decline in new unemployment insurance claims for the week ending August 31, falling to 227,000 from 232,000 the previous week.
- San Francisco Federal Reserve President Mary Daly said that falling inflation and a slowing economy mean the U.S. central bank needs to adjust policy to changes in the economy and cut interest rates.
- Chicago Fed President Austan Goolsbee said Friday that longer-term trends in the labor market and inflation data justify steadily easing interest rate policy for the foreseeable future and over the next year.
- According to CME Group's FedWatch tool, the market is pricing in a 40% chance that the Fed will cut borrowing costs by 50 basis points at its Sept. 17-18 monetary policy meeting.
- Meanwhile, dovish expectations have kept U.S. Treasury yields depressed and put dollar bulls on the defensive, which should be a boon for low-yielding gold prices.
- Market attention has now shifted to the key US Non-Farm Payrolls (NFP) report, which is expected to show that employment increased by 160,000 in August and the unemployment rate fell to 4.2%.
Technical analysis: A decisive clearing of the $2,524-$2.525 hurdle could accelerate gold prices' upside
From a technical perspective, momentum above the immediate hurdle of $2,524-2,525 will provide a fresh impetus for bullish traders. Moreover, oscillators on the daily chart are holding in positive territory and have yet to reach the overbought zone. This suggests that the path of least resistance for gold prices is to the upside. Follow-through buying above the all-time high around $2,531-2,532, touched on August 20, will reaffirm the constructive outlook and pave the way for further upside.
Conversely, the psychological milestone of $2,500 appears to be preventing a near-term decline that could see gold prices drop to the horizontal support at $2,471-$2,470. A firm break below the latter would signal a further decline towards the 50-day simple moving average (SMA), currently anchored around $2,440, and then towards the $2,400 milestone and the 100-day simple moving average around $2,388.
Gold FAQ
Gold has played a vital role throughout human history, as it has been widely used as a store of value and a medium of exchange. Today, apart from its luster and use in jewellery, the precious metal is widely recognised as a safe haven asset and considered a good investment during volatile times. Gold is also widely seen as a hedge against inflation and currency depreciation, as it is not tied to any particular issuer or government.
Central banks are the largest holders of gold. To support their currencies in times of uncertainty, central banks tend to buy gold to diversify their reserves and to impress upon them the strength of their economies and currencies. Large gold reserves can be a source of confidence in a country's solvency. According to data from the World Gold Council, central banks added 1,136 tonnes of gold worth about $70 billion to their reserves in 2022, the highest annual purchase since records began. Central banks in emerging countries such as China, India and Turkey are rapidly increasing their gold reserves.
Gold is inversely correlated with the US Dollar and US Treasury Bonds, which are the primary reserve and safe haven assets. When the US Dollar falls, gold tends to rise, allowing investors and central banks to diversify their assets during volatile times. Gold is also inversely correlated with risk assets. Rising stock markets tend to drive gold prices down, while sell-offs in risky markets tend to favor the precious metal.
Gold prices fluctuate due to a variety of factors. Geopolitical instability or fears of a deep recession can send gold prices soaring due to gold's status as a safe haven. As a non-yielding asset, gold tends to rise in value the lower interest rates are, but rising cost of funds typically weighs on gold. Still, since the asset is priced in dollars (XAU/USD), most of the movement is determined by the movement of the US Dollar (USD). A strong dollar tends to suppress gold prices, while a weak dollar can boost gold prices.
