- Gold failed to break above the resistance of $2,531 and fell to close at $2,493 amid growing expectations of a Fed interest rate cut.
- U.S. nonfarm payrolls came in weaker than expected, but improving numbers and rising hourly wages raised uncertainty around a 25 or 50 basis point cut.
- Despite the decline in Treasury yields, the US Dollar Index recovered above 101.00, exerting further pressure on gold prices.
Gold failed to test its all-time high of $2,531 and retreated after plummeting more than 0.80% in late North American session. US economic data cast doubt on whether the Federal Reserve will cut interest rates by 50 or 25 basis points (bps) at its September meeting. XAU/USD is trading at $2,493 after hitting a record high of $2,529.
The U.S. Bureau of Labor Statistics (BLS) announced that August's nonfarm payrolls (NFP) fell short of expectations, but was an improvement from July's downwardly revised figure. A closer look at the report showed that the unemployment rate had fallen from the previous month, and average hourly wages had increased.
Data showed that Fed interest rate outlooks fluctuated widely. At one point, traders were pricing in a 50-bps cut, with the probability of that rising to 70%, according to data from the CME FedWatch tool. But once the dust settled, market participants were estimating a 25-bps cut was more likely, with that probability rising to 73%, while the likelihood of a 50-bps cut fell to 27%.
Meanwhile, comments from Federal Reserve policymakers were also reported in the news. New York Fed President John Williams said that lowering interest rates in the near future would help balance the labor market. Fed President Christopher Waller, speaking at the University of Notre Dame, echoed some of Williams' comments. Waller said, “The time has come to begin easing policy,” making clear his openness to any level of easing.
Chicago Fed President Austin Goolsbee recently struck a dovish tone, saying policymakers have reached a “overwhelming” agreement to lower borrowing costs.
In response to this situation, gold prices have fallen, even as U.S. Treasury yields have fallen. Recently, the U.S. dollar has recovered from a drop below 101.00, rising by more than 0.15%, as evidenced by the U.S. Dollar Index (DXY) rising to 101.22.
On the geopolitical front, US Secretary of State Antony Blinken said via Reuters, “90 percent of the Gaza ceasefire agreement has been reached, but significant issues remain where there are gaps. It is up to both sides to reach agreement on the remaining issues.”
Daily Digest Market Trends: Gold prices fall as traders ignore mixed US jobs data
- The US NFP rose by 142,000 in August, below expectations of 160,000, while the July figure was revised down from 114,000 to 89,000.
- The unemployment rate fell to 4.2% from 4.3% in August, while average hourly wages rose from 3.6% to 3.8% year-on-year.
- Based on December 2024 federal funds rate futures contracts, the Fed is expected to cut rates by at least 104 basis points (bps) this year, up from 103 bps the previous day, according to data from the Chicago Board of Trade.
Technical outlook: Strong US dollar pushes gold prices below $2,500
Gold prices continue to trend higher but appear to have turned lower in the short term as XAU/USD reached a daily peak above $2,520 before reversing direction and forming a “Bearish Engulfing” candlestick chart pattern, opening the door for further losses.
Momentum has turned bearish as indicated by the Relative Strength Index (RSI), which is close to dropping below the neutral level.
If the XAU/USD pair sinks below the Aug. 22 low of $2,470, it will open the door for further declines. The next demand zone is the confluence of the April 12 high, which provided support, and the 50-day simple moving average (SMA) between $2,435 and $2,431.
On the other hand, if the buyers manage to push the price above $2,500, the next resistance is at the year-to-date high of $2,531. Above this, the next stops would be at the psychological $2,550 level, followed by the $2,600 levels.
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 dependent on 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.
