The gold market has recently experienced a drop below $2,500 following the release of the US PCE report, which has increased the likelihood of a rate cut by the Federal Reserve in September. Traders are currently expecting a 25 basis point cut rather than a more aggressive 50 basis point reduction. This cautious policy easing strategy by the Fed has stirred uncertainty in the markets, leading to a rise in bets for a rate cut. However, it is important to note that the December 2024 Chicago Board of Trade fed funds future rates contract suggests that investors anticipate a significant amount of Fed easing by the end of the year.
The US core PCE reading for July revealed a 2.6% year-over-year increase in prices, in line with expectations but slightly below the estimate. While consumer spending saw a rise, income growth remained sluggish, sparking concerns about the sustainability of current spending levels. Despite this, the University of Michigan reported an increase in US Consumer Sentiment from July to August. Inflation expectations for the short term decreased slightly, while medium-term expectations remained steady.
Although gold prices have dipped below $2,500, they remain upwardly biased. However, a ‘bearish engulfing’ chart pattern looms, indicating a potential reversal. The Relative Strength Index (RSI) shows that sellers are currently in control in the short term, with mixed readings that suggest a possible downturn. If gold closes below $2,500, the next support levels to watch for are at $2,470 and $2,431. On the other hand, if gold remains above $2,500, resistance levels at $2,550 and $2,600 could come into play.
Gold has historically served as a store of value and medium of exchange, with its shine and use in jewelry being well-known attributes. It is also widely considered a safe-haven asset, making it an attractive investment during times of economic uncertainty. Additionally, gold is viewed as a hedge against inflation and depreciating currencies, as it is not tied to any specific government or issuer. Central banks hold significant amounts of gold in their reserves to bolster their currencies and improve economic stability. In recent years, emerging economies such as China, India, and Turkey have been increasing their gold holdings.
Gold prices tend to have an inverse correlation with the US Dollar and US Treasuries, both of which are major reserve and safe-haven assets. Geopolitical instability, fears of recession, and changes in interest rates can all impact the price of gold. A strong dollar typically keeps gold prices in check, while a weaker dollar tends to push gold prices higher. Gold is also inversely correlated with risk assets, meaning that market volatility can influence its price movements.
Overall, the gold market is influenced by a complex interplay of economic indicators, market sentiment, and geopolitical factors. While the recent drop below $2,500 may have raised concerns among investors, the long-term outlook for gold remains positive given its status as a safe-haven asset and potential hedge against economic instability. Investors should continue to closely monitor market trends and indicators to make informed decisions about their gold investments.