Gold (XAU/USD) found itself back in the $2,330s on Friday, reversing the gains made following the release of the US Personal Consumption Expenditure (PCE) data for April. The PCE, the Federal Reserve's (Fed) preferred gauge of inflation, showed cooling core price pressures. According to the Bureau of Economic Analysis, Core PCE cooled to 0.2% month-over-month from the previous 0.3%, contrary to analysts' expectations that it would remain unchanged at 0.3%.
Although the rest of the PCE data aligned with analysts' estimates, the undershoot in Core PCE indicated that inflation in the US was cooling more rapidly than anticipated. This revelation increased the likelihood of the Fed cutting interest rates sooner than expected. Typically, lower interest rates benefit Gold, as they reduce the opportunity cost of holding the non-yielding asset. Consequently, the precious metal's price rose after the data release.
The gains followed a recovery that began on Thursday, spurred by weaker US growth data suggesting that inflation would remain contained, leading to lower interest rate projections.
However, as traders wrapped up for the weekend, Gold's price pulled back, potentially ending the day in the negative.
Gold Recovers After US Growth Slows
On Thursday, Gold rebounded after the second estimate of US first-quarter GDP growth revealed a downward revision to an annualized 1.3% from the initial 1.6%. This slower growth stemmed from lower consumer spending, which is expected to keep inflation in check and keep the Fed on track to lower interest rates. Reflecting changing expectations post-GDP release, the US 10-year Treasury Note yield dropped to 4.55% from a four-week peak of 4.63%.
Although the probabilities of the Fed cutting interest rates before September are minimal, data from the CME FedWatch Tool indicates a 55% chance of a cut in September.
Gold and Asian Demand as a Currency Hedge
US interest-rate expectations are not the sole factor influencing Gold prices. According to Daniel Ghali, a Senior Commodity Strategist at TD Securities, Gold demand is being driven by Asian buyers who are hoarding the precious metal as a hedge against their depreciating currencies against a strengthening US Dollar (USD).
“Precious metals are acting as a currency depreciation hedge. Case in point: fund flows into Chinese gold ETFs are rising once more at their fastest pace since the massive buying activity observed in April. US yields are surging, the dollar broke out of its lull, and yet precious metals prices have remained extremely resilient,” says Ghali.
This suggests that the strength of the US Dollar may not be as negatively correlated with Gold as in the past, potentially capping Gold prices if the USD appreciates.
Technical Analysis: Gold Poised for Weakness After Breakout from Bear Flag
Gold's price has broken out of a slanted rectangular formation, likely a Bear Flag continuation price pattern that formed between May 24 and 27. This breakout activates the Bear Flag's downside target zone of $2,303 to $2,295. A break below Thursday’s $2,322 lows would provide further bearish confirmation.
Bear Flags resemble upside-down flags, consisting of a sharp decline—the flagpole—and the consolidation phase or “flag square”.
A more bearish move could potentially see Gold fall to the $2,272-$2,277 range, aligning with the 100% extrapolation of the move prior to the trend-line break and historical support and resistance.
Gold's 4-hour chart, used to assess the short-term trend, now shows a sequence of declining peaks and troughs, indicating a short-term downtrend and favoring short positions over longs. Despite this, Gold’s medium and long-term trends remain bullish, suggesting a high risk of recovery. However, current price action does not support this recovery hypothesis.
For evidence of a recovery and a reversal of the short-term downtrend, a decisive break back above the trendline, now around $2,385, would be necessary. Such a break would need to be accompanied by a long green bullish candle or three consecutive green candles.
As traders keep a close watch on the unfolding economic indicators and central bank policies, Gold's journey remains unpredictable, reflecting the intricate dance between market expectations and macroeconomic realities.
