Gold price falls slightly as US Dollar advances ahead of US manufacturing PMI, NFP

• Gold price faces mild selling pressure, Fed’s signals for rate cuts and Middle East woes keep the broader bullish trend intact.

• The Fed acknowledged that policymakers have gained greater confidence due to a slowdown in price pressures in the second quarter.

• Investors await the US ISM Manufacturing PMI and the NFP data for July.

Gold price (XAU/USD) edges lower after posting an almost two-week high at $2,458.50 in Thursday’s European session. The precious metal falls slightly as the US Dollar (USD) rebounds. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, bounces back strongly to 104.20 after discovering strong buying interest near the intraday low of 103.86. A sharp recovery in the US Dollar makes investment in Gold less attractive.

However, the broader appeal of the Gold price remains firm as US bond yields have tumbled further on firm expectations that the Federal Reserve (Fed) will pivot to policy normalization in September. 10-year US Treasury yields plummet to almost six-month low near 4.03%. Lower yields on interest-bearing assets bode well for non-yielding assets, such as Gold, as it reduces the opportunity cost of holding investment in them.

The expectations for the Fed to begin reducing interest rates from September rose after the Fed’s dovish guidance on interest rates on Wednesday. The Fed left interest rates unchanged in the range of 5.25% -5.50% and pointed to cooling inflationary pressures, easing labor market strength, as expected, which made speculation for rate cuts in September as a done deal.

Fed Chair Jerome Powell said, "If we were to see inflation moving down more or less in line with expectations, growth remains reasonably strong, and the labor market remains consistent with current conditions, then I think a rate cut could be on the table at the September meeting”, Reuters reported.

Daily digest market movers: Gold price capitalizes on Fed’s dovish guidance and Middle East conflicts

• Gold price gradually declines to near $2,440 in Thursday’s European trading hours. However, its near-term outlook remains firm due to multiple tailwinds. Apart from firm expectations that the Fed will start lowering its key borrowing rates from September, upside risks to widening Middle East conflicts have improved Gold’s safe-haven appeal.

• Iran vows to retaliate for the killing of Hamas leader Ismail Haniyeh by an Israeli air strike in Tehran, stating that Israel will "pay a heavy price”. This has prompted risks of an all-out war in the Middle East. Historically, investors see investment in precious metals as a safe bet amid geopolitical tensions.

• In Thursday’s session, investors will focus on the United States (US) ISM Manufacturing Purchasing Managers’ Index (PMI) report for July, which will be published at 14:00 GMT. The PMI report is expected to show that activities in the manufacturing sector improved, rising to 48.8 from June’s reading of 48.5, but remain contracted. A figure below the 50.0 threshold is considered a contraction in factory activities. 

• In the same period, the Manufacturing Prices Paid index is estimated to have expanded at a slower pace of 51.8 from the former release of 52.1. The Prices Paid index is a key measure of change in input prices. A slower growth in this index boosts expectations of cooling inflationary pressures. 

• Going forward, the major trigger for the FX domain will be the US Nonfarm Payrolls (NFP) report, which will be published on Friday. Economists have estimated that 175K new workers were hired in July, lower than the former addition of 206K. The Unemployment Rate is expected to remain steady at 4.1%. Investors will keenly focus on the Average Hourly Earnings data, a key measure of wage growth that fuels consumer spending, which eventually influences price pressures. Annually, the wage growth measure is estimated to have decelerated to 3.7% from the prior reading of 3.9%, with the monthly figure growing steadily by 0.3%.

Technical Analysis: Gold price trades in channel formation

Gold price trades in a channel formation on a daily timeframe, which is slightly rising but broadly exhibited a sideways performance for more than three months. The 50-day Exponential Moving Average (EMA) near $2,370 continues to provide support to the Gold price bulls. 

The 14-day Relative Strength Index (RSI) moves higher to near 60.00. If the RSI climbs above that level, the momentum will shift to the upside.

Fresh upside would appear if the Gold price breaks above its all-time high of $2,483.75, which will send it into an unchartered territory.

On the downside, the upward-sloping trendline at $2,225, plotted from the October 6 low near $1,810.50, will be a major support in the longer term.

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.