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    Gold price holds strength with focus on US core PCE price index data

    Source Fxstreet
    Feb 27, 2024 10:06
    • Gold price posts gains ahead of US Durable Goods Order data.
    • Fed’s Schmid says there is no need to rush rate cuts.
    • The US core PCE price index data will significantly impact prospects for Fed rate cuts.

    Gold price (XAG/USD) exhibits strength against the US Dollar in Tuesday’s European session on hopes that the Federal Reserve (Fed) will eventually bring interest rates down. However, the upside in the precious metal seems capped as Fed policymakers lean towards maintaining interest rates higher for longer to build downward pressure on sticky inflation.

    Non-yielding assets, such as Gold, attract higher inflows when investors believe the Fed will eventually begin to roll back its restrictive interest rate stance. Spot prices of Gold are up by 0.23% at $2,036.

    Fed policymakers underpin a wait-and-watch approach on interest rates, citing that risks associated with premature rate cuts are higher than postponing them. The Fed is expected to avoid considering rate cuts until it gets evidence that inflation will fall sustainably to the 2% target.

    This week, the US Dollar will be guided by the United States core Personal Consumption Expenditure – Price Index (PCE) data, which will be published on Thursday. Fed policymakers consider the underlying inflation data before preparing remarks on interest rates. The degree of change in the core PCE inflation data would influence market expectations for rate cuts.

    Daily Digest Market Movers: Gold price eyes more gains while US Dollar corrects

    • Gold price rises sharply to $2,040 as the US Dollar falls onto the backfoot.
    • The precious metal climbs to almost a three-week high even though investors remain uncertain about rate cuts by the Federal Reserve (Fed).
    • All Fed policymakers have argued against premature rate cuts as they could flare up price pressures again.
    • Also, policymakers still gather evidence to confirm that inflation will decline sustainably to the 2% target.
    • On Monday, Kansas City Federal Reserve Bank President Jeffrey Schmid said a tight labor market, considerable momentum in households’ demand, and inflation above 2% leave no room for an aggressive adjustment in the monetary policy stance.
    • As per the viewpoint of Jeffrey Schmid, the Fed needs to be patient and observe how the economy responds to policy tightening. The rate cuts could be announced only after gaining confidence that a victory can be announced against sticky inflation.
    • This week, the array of the United States economic data will direct further action in the Gold price.
    • US Durable Goods Orders, second estimates for Q4 Gross Domestic Product (GDP), and core PCE price index data are lined up for release.
    • The US Durable Goods Orders for January are anticipated to have contracted sharply by 4.5% against a stagnant performance in December. Weak demand for Durable Goods indicates a soft outlook for core inflation.
    • Investors will majorly focus on the core PCE price index, which could meaningfully influence the expectations for rate cuts by the Fed.
    • The expectations from investors show that the core PCE price index data rose by 0.4% on a month-on-month basis against a 0.2% increase in December. In the same period, the annual inflation data is expected to have decelerated to 2.8% from 2.9%.

    Technical Analysis: Gold price marches toward $2,040

    Gold price approaches the downward-sloping border of the Symmetrical Triangle pattern, which is plotted from the December 28 high at $2,088. The upward-sloping border of the chart pattern is placed from the December 13 low at $1,973.

    The triangle could break out in either direction. However, the odds marginally favor a move in the direction of the trend before the formation of the triangle – in this case, up. A decisive break above or below the triangle boundary lines would indicate a breakout is underway. 

    The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 region, which indicates indecisiveness among investors.

    Gold FAQs

    Why do people invest in Gold?

    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.

    Who buys the most Gold?

    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.

    How is Gold correlated with other assets?

    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.

    What does the price of Gold depend on?

    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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