- Gold is falling in line with a bearish short-term technical picture and a US Dollar bounce.
- Lower global inflation expectations are prompting investors to rotate into bonds, possibly draining investment away from Gold.
- XAU/USD technicals indicate the potential for more downside following a recent trendline break.
Gold (XAU/USD) trades over three quarters of a percent lower in the $2,330s on Tuesday. A slight bounce from the US Dollar (USD), which is negatively correlated to Gold, could be partly responsible as could asset rotation into bonds. Commodities in general are trading lower – and the move is in line with Gold technicals which are short-term bearish.
Gold weakens as broader commodity markets sell-off
The lion’s share of commodities and most equity markets are selling off on Tuesday, which – apart from idiosyncratic reasons such as the OPEC+ decision and Indian elections – seems to be a result of generalized fears about global economic growth. This seems to be due to the poor US ISM Manufacturing PMI data released on Monday. Another reason could be asset rotation as increasing numbers of investors reallocate to bonds.
There are growing signs inflation is falling globally, with Friday’s US core PCE data undershooting estimates and Swiss inflation similarly missing the mark on Tuesday, after coming out at 0.3% month-over-month in May when economists had estimated a 0.4% rise.
The Swiss CPI data has sparked speculation the Swiss National Bank (SNB) could make another interest rate cut at its meeting in June. With the European central Bank (ECB) highly anticipated to cut interest rates on Thursday and increasing speculation the Bank of Canada (BoC) could also cut rates on Wednesday, global bond markets are rallying and could be draining investment from Gold.
Technical Analysis: Gold trades along 50-day SMA
Gold price is finding support at the 50-day Simple Moving Average (SMA) and consolidating after a sell-off from the May highs.
XAU/USD has broken through a major trendline and is probably in a short-term downtrend. Given “the trend is your friend” the odds favor more weakness.
XAU/USD Daily Chart
The trendline break generated downside targets. The length of the move prior to a break can be used as a guide to the follow-through after a break, according to technical analysis. In the case of Gold, these have been labeled “a” and “b” respectively.
The first target is at $2,303, which is the 0.618 Fibonacci extrapolation of “a”.
Gold could even fall to $2,272-$2,279, the 100% extrapolation of “a” and the end of “b”. This also happens to be an area of historical support (red line).
The precious metal’s medium and long-term trends, however, are still bullish and the risk of a recovery remains high. That said, price action is not supporting a resumption hypothesis at the moment.
A break above $2,362 (May 29 high) would be required to bring into doubt the integrity of the short-term downtrend, otherwise further weakness is foreseen.
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.