As the US core PCE reading for July revealed a 2.6% increase in prices year over year, in line with expectations but slightly below estimates, the markets reacted by pushing gold prices below $2,500. The headline PCE came in at 2.5% year over year, falling short of the projected 2.6% rise. This data led to uncertainty among traders and investors, causing them to favor a 25 basis points rate cut by the Federal Reserve in September. The likelihood of a 50 basis points reduction decreased to 31%, highlighting the cautious policy easing strategy of the Fed in light of economic indicators.
Investor Sentiment and Gold Price Movement:
Despite the dip below $2,500, gold prices remain upwardly biased. However, a ‘bearish engulfing’ chart pattern looms over the precious metal’s future performance. The Relative Strength Index (RSI) indicates that sellers are currently in charge in the short term, even though mixed readings suggest bullish territory. If XAU/USD closes below $2,500, the next support level would be at $2,470, followed by the August 22 low of $2,431. On the other hand, if XAU/USD maintains above $2,500, the next resistance levels would be at the all-time high and $2,550, with a breach potentially leading to $2,600.
Gold has historically served as a store of value and medium of exchange, beyond its ornamental use in jewelry. It is widely regarded as a safe-haven asset, sought after during times of market turbulence. As a hedge against inflation and depreciating currencies, gold’s status as a non-issuer dependent asset enhances its appeal. Central banks, the largest holders of gold, use it to bolster reserves during economic uncertainties. In 2022, central banks added a record 1,136 tonnes of gold to their reserves, valued at $70 billion, highlighting the metal’s significance in global economies.
Gold exhibits an inverse correlation with the US Dollar and US Treasuries, major reserve and safe-haven assets. A weakening dollar typically leads to a rise in gold prices, enabling investors to diversify assets in volatile times. Gold’s performance also reacts inversely to that of risk assets, strengthening during market sell-offs and weakening in stock market rallies. Geopolitical instability and economic recession fears can drive gold prices higher due to its safe-haven appeal. In addition, gold prices are influenced by interest rates, with lower rates generally favoring gold appreciation.
The recent drop in gold prices below $2,500 following the US PCE report underscores the impact of economic indicators on the precious metal’s value. The likelihood of a Fed rate cut in September has heightened market uncertainty, with investors leaning towards a 25 basis points reduction. Gold’s role as a safe-haven asset and its inverse correlation with the US Dollar and risk assets continue to influence its price movements. As global economic conditions evolve, the trajectory of gold prices will remain sensitive to market sentiment and central bank policies.