The recent US PCE report has had a significant impact on gold prices, causing them to fall below the $2,500 mark. This drop has raised the likelihood of a rate cut by the Federal Reserve in September. The Fed’s cautious approach to policy easing has created uncertainty in the markets, with many traders now expecting a 25 basis point cut. According to the CME FedWatch Tool, the probability of a 25 basis point cut has risen to 69%, while the odds of a 50 basis point reduction have fallen to 31%.
The US core PCE reading for July revealed that prices had increased by 2.6% year-over-year, remaining unchanged from the previous month but slightly below the estimated 2.7%. The headline PCE came in at 2.5% year-over-year, falling short of the expected 2.6% rise. While consumer spending has seen an increase, income growth has been sluggish, leading to concerns about the sustainability of Americans’ spending habits. The University of Michigan reported that US Consumer Sentiment rose 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 remained steady at 3%.
Despite the drop below $2,500, the price of gold remains on an upward trend. However, a ‘bearish engulfing’ chart pattern is looming, which could signal a potential reversal. The Relative Strength Index (RSI) shows that sellers are currently in control in the short term, indicating a bearish outlook despite mixed readings. If the XAU/USD pair closes below $2,500, the next support level would be at the August 22 low of $2,470. Further support can be found at the confluence of the August 15 swing low and the 50-day Simple Moving Average at $2,431. On the other hand, if the XAU/USD pair remains above $2,500, the next resistance level would be at the all-time high, with subsequent resistance at the $2,550 mark and beyond.
Gold has historically played a crucial role as a store of value and medium of exchange. In addition to its aesthetic appeal for jewelry, gold is widely regarded as a safe-haven asset, making it a popular investment during times of economic uncertainty. It is also seen as a hedge against inflation and currency depreciation, as it is not tied to any specific issuer or government. Central banks are major holders of gold, using it as a means to support their currencies in times of turmoil and enhance economic stability. Recent data from the World Gold Council shows that central banks added a record 1,136 tonnes of gold to their reserves in 2022, worth around $70 billion. Emerging economies such as China, India, and Turkey are rapidly increasing their gold reserves as a way to boost their solvency and currency strength.
Factors Influencing Gold Prices
Gold prices are influenced by a wide range of factors, including its inverse correlation with the US dollar and US Treasuries, major reserve assets. When the dollar weakens, gold prices tend to rise, providing investors and central banks with a means to diversify their assets during uncertain times. Gold also has an inverse relationship with risk assets, as a rally in the stock market can dampen gold prices, while market sell-offs tend to benefit the precious metal. Geopolitical instability and fears of a recession can quickly escalate gold prices due to its safe-haven status. Additionally, interest rates play a significant role in gold price movements, as lower rates typically drive gold prices up, while higher rates tend to suppress the metal’s value. Ultimately, the behavior of the US dollar, as gold is priced in dollars, has a major influence on gold prices, with a strong dollar typically keeping gold prices in check, while a weaker dollar can push prices higher.
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