Gold price plunges to one-week low on strong US data and rising Treasury yields

Source Fxstreet
May 23, 2024 19:49
  • Gold price declines for third straight day, now at $2,332, down from high of $2,383.
  • Strong US economic data boosts Treasury yields and US Dollar, impacting Gold prices.
  • Fed minutes suggest more rate hikes possible if inflation continues, rate cut expectations reduced to 27 basis points by end of 2024.
  • Emerging market central banks have acquired 2,200 tons of gold since Q3 2022, influenced by sanctions on Russia.

Gold price tanks for the third straight day on Thursday, refreshing one-week lows after economic data from the United States spurred a jump in US Treasury yields and boosted the American Dollar. That hurt the Federal Reserve's (Fed) rate cut hopes with investors expecting just 27 basis points of easing toward the end of 2024, based on Chicago Board of Trade (CBOT) data.

At the time of writing, the XAU/USD trades at $2,332, plunging 1.90% after reaching a high of $2,383.

US business activity is gathering pace, revealed S&P Global on its May final reading of the Manufacturing, Services, and Composite PMIs. Earlier, the US Bureau of Labor Statistics (BLS) showed that the number of Americans filing for unemployment benefits was shy of estimates and less than the previous reading, indicating strength in the labor market.

The data boosted the Greenback, which, according to the US Dollar Index (DXY), gained 0.18% and is back above 105.00. In addition, the Fed Minutes revealed on Wednesday showed that some officials were ready to raise rates if inflation warranted, a headwind for the non-yielding metal.

Gold prices were underpinned by emerging markets' central bank buying, according to an article in The Wall Street Journal. The catalyst that sparked the buying was Western sanctions on Russia after its invasion of Ukraine.

The World Gold Council revealed that central banks added around 2,200 tons of the golden metal since Q3 2022.

Daily digest market movers: Gold price falls as US yields climbed following upbeat US PMIs

  • Gold prices are undermined by the rise in US Treasury yields. The US 10-year Treasury note yield edges up five basis points to 4.477%, a headwind for the yellow metal.
  • Initial Jobless Claims in the US reached 215K for the week ending May 18, which was lower than the estimated 220K and the previous week's reading of 223K.
  • S&P Global released the final US PMI readings for May. The Manufacturing PMI rose to 50.9, surpassing both estimates and April's figure of 50.0. The Services PMI significantly outperformed forecasts and April's 51.3, increasing to 54.8.
  • S&P Global Composite PMI also improved, climbing from 51.3 to 54.4, and exceeded the forecast of 51.1.
  • The FOMC Minutes showed that Fed officials remained uncertain about the degree of policy restrictiveness. They added that “it would take longer than previously anticipated to gain greater confidence in inflation moving sustainably to 2%.”
  • Data from the Chicago Board of Trade shows investors are expecting 27 basis points of Fed easing toward the end of the year.

Technical analysis: Gold price slides below $2,350 as bears target $2,300

Gold price remains upwardly biased despite posting losses for the third straight day. In the short term, momentum has shifted negatively. This is shown by the Relative Strength Index (RSI), which dropped below the 50-midline, an indication that sellers are in charge.

That said, the XAU/USD’s first support would be the May 13 low at $2,332, followed by the May 8 low of $2,303. Once those levels are surpassed, the 50-day Simple Moving Average (SMA) at $2,307 will be up next.

On the other hand, if buyers push prices above $2,350, the $2,400 mark could be exposed. Gold prices could rally and, on further strength, retest the year-to-date (YTD) high at $2,450.

Gold FAQs

Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.

Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.

Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.

The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.

 

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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