Gold Outlook: Gold’s price stabilises for now

黄金’s price overall maintained a sideways motion over the past week. In today’s report we intend to lay out the main fundamental challenges ahead for gold’s price including the negative correlation of the USD with gold’s price, any financial releases in the coming week that could also have an effect on gold’s price and address possible safe haven concerns of gold traders.  Finally, we will be concluding this report with a technical analysis of gold’s daily chart.

Gold’s negative correlation with the USD blurred

We make a start by noting that the negative correlation of gold’s price to the USD seems to have been blurred somewhat. It’s characteristic that the USD continued to weaken in the past week substantially, yet stabilised somewhat during Monday and todays’ Asian session. On the flip side gold’s price remained relatively stable in the past week and during Monday. The inconsistency in the movement of the two trading instruments over the prementioned period, tended to blur the negative correlation of the two trading instruments as perceived by the market.

At this point, it should be noted that the yields of US bonds tended to send out mixed signals since last Tuesday the day of our last report. Short term US yields like the two year bond yield, tended to remain at lower levels in the past week, despite a resurgence since Friday, while longer term bond yields, like the seven and ten year yields, are at higher levels, than last week.

Yet US yields since last Thursday have been consistently on the rise and should the rise be magnified further in the coming week, we may see them having an adverse effect on gold’s price as the antagonistic relationship of gold with US bonds may shift the market’s attention towards the latter, given that gold bears no interest, on the contrary it bears storage costs.

The release of the Core PCE price index for July

On coming Friday we highlight the release of July’s Core and headline PCE price index rates. The release gains on attention as the rate is the Fed’s favorite measure and is considered as a key test for the US economy along with the CPI rates and the US employment report. The core rate is expected to tick up and reach 2.7% yoy if compared to June’s 2.6% yoy. Should the rate accelerate as forecasted it would signal a persistence of inflationary pressures in the US economy that may force the market to reposition itself in regards to its extensive dovish expectations in regards to the Fed’s intentions. Please note, that currently the market prices in the scenario that the bank will proceed with a 25-basis points rate cut in the September meeting, a double 50-basis rate cut in November and another 25-basis points rate cut in the December meeting, implying a full 1% reduction of interest rates before Christmas.

Should the Core PCE rates accelerate we may see the market readjusting its expectations and thus provide support for the USD, while at the same time weaken gold prices. On the flip side, we have to note that Fed Chairman Powell in his speech at the Jackson Hole Economic Symposium, mentioned the shift in the bank’s attention from curbing inflationary pressures on the weakening US labour market, which in turn could lower the impact of the release.

Potential safe haven flows

On a deeper fundamental level, we also note the safe haven nature of the precious metal. Maybe the most interesting issue ahead for gold is the situation of the Israel-Palestinian conflict and the Middle East in general. Hopes for a possible ceasefire seem to be fading away and worries for an intensification of the conflict could create safe haven inflows for the precious metal. It should also be noted that the risk of an overspill of the Israel-Palestinian conflict, practically the bombing of Palestinians by Israel could overspill and become a regional issue.

Especially the risk of Israel invading Lebanon should not be underestimated as the risk of tensions between Egypt and Israel, given the presence of the Israel Defence Forces at the border of Gaza with Egypt. Another issue we would like to highlight are the tensions in the US-Sino relationships. US National Security advisor Jake Sullivan is visiting China and discussions are expected to be contacted about  Middle East and Ukraine, Taiwan and fentanyl.

On the other hand the Chinese are expected to express disapproval over US tariffs on Chinese products and try to reaffirm its control over Taiwan. Should the negotiations fail to produce a positive outcome, market worries could intensify, thus creating some safe haven inflows for the precious metal.

Gold Technical Analysis

XAUUSD Daily Chart

• Support: 2450 (S1), 2355 (S2), 2280 (S3)
• Resistance: 2530 (R1), 2600 (R2), 2700 (R3)

On a technical level we note that gold’s price seems to have stabilised just below the 2530 (R1) resistance line. We tend maintain a bias for the sideways motion between the 2450 (S1) and the 2530 (R1) levels to be maintained for now.

Despite an upward trendline guiding the precious metal’s price since the 8    of August forming continuous higher troughs, gold’s price action seems to have hit a ceiling on the 2530 (R1) resistance line. The RSI indicator remains between the readings of 50 and 70, implying the presence of a bullish predisposition of market participants for gold’s price.

Also please note that the 20, 100 and 200 moving averages all have an upward slope supporting the notion of a bullish outlook for gold’s price. For a bullish outlook we would require the precious metal’s price to break the 2530 (R1) resistance line, which is a record high level for gold’s price and set as the next possible target for the bulls the 2600 (R2) resistance level.

Should the bears take over, we expect gold’s price to break the prementioned upward trendline, signaling the interruption of the upward movement but also the price action to break the 2450 (S1) support line clearly, taking aim of the 2355 (S2) support base. 

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