Gold Price Forecast: XAU/USD drifts lower to near $2,500 on firmer US Dollar

• Gold price trades in negative territory around $2,500 in Monday’s early Asian session.
• The US Core PCE inflation remains unchanged at 2.6%, matching June's increase, below the consensus of 2.7%. 
• Any signs of a Chinese sluggish economy might weigh on the Gold price. 

Gold price (XAU/USD) softens near $2,500 on Monday during the early Asian trading hours, pressured by the stronger US Dollar (USD). However, the downside of the yellow metal might be limited as a September interest rate cut by the US Federal Reserve (Fed) remains in play.

The Commerce Department revealed on Friday that the US Personal Consumption Expenditures (PCE) Price Index rose 0.2% MoM in July, matching the market expectation. On a yearly basis, the PCE inflation remained unchanged at 2.5% in July. Meanwhile, the core PCE, excluding volatile food and energy prices, increased 0.2% for the month but rose 2.6% from a year ago. The annual figure was slightly softer than the 2.7% expected. 

Alex Ebkarian, chief operating officer at Allegiance Gold, said that the PCE report confirmed inflation is no longer the Fed's main concern, as they have shifted their focus to unemployment data, which further validates the potential rate cuts in September.

Traders slightly raised bets of a 25 basis points (bps) rate cut by the Fed in September to around 70%, with a 50 bps reduction possibility standing at 30% following the PCE inflation report, according to the CME FedWatch tool. The firmer Fed rate cut expectation is likely to support the Gold price in the near term as lower interest rates reduce the opportunity cost of holding non-yielding gold.

Israel’s largest labor group is planning a nationwide strike on Monday, the strongest push yet to force the government into a Gaza cease-fire and secure the release of hostages held by Hamas, per Bloomberg. Investors will closely watch the developments surrounding the conflicts in the Middle East. Any signs of escalating tensions in the region could boost the safe-haven demand, benefiting the Gold Price. 

However, physical gold demand concerns and the sluggish economy in China might cap the precious metal’s upside as China is the world’s top buyer for Gold. The Chinese Caixin Manufacturing PMI for August is due on Monday, and is estimated to improve to 50.0 versus 49.8 prior. The weaker-than-expected outcome could weigh on the XAU/USD price. 

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.