Market Analysis

Gold increases due to China's renewed demand and Nvidia's disappointment

Amos Simanungkalit · 29 Aug 2024146.6K Views

Gold (XAU/USD) is trading approximately half a percent higher on Thursday, hovering in the $2,510 range, bolstered by safe-haven demand amid mildly negative market sentiment following disappointing Nvidia earnings. While the tech giant's Q2 earnings surpassed expectations, they failed to justify the stock's high valuation, dampening investor enthusiasm. However, European stocks are showing signs of recovery after a shaky start, suggesting a possible shift in broader market sentiment.

Gold is also benefiting from a report indicating a resurgence in demand from China. Data from the World Gold Council (WGC) released on Tuesday revealed that China’s net Gold imports rose by 17% in July, marking the first monthly increase since March. Additionally, last week saw a modest net inflow of 8 metric tons ($403 million) of Gold, primarily driven by North American funds.

The precious metal is likely also supported by a weakening US Dollar (USD), to which it is inversely correlated. The US Dollar Index (DXY) is retreating on Thursday, trading in the 100.90 range, after peaking at 101.18 on Wednesday.

Traders are now focused on upcoming US Jobless Claims and Gross Domestic Product (GDP) data, due on Thursday, for further insights into the future path of US interest rates. The jobs data is particularly relevant, as Federal Reserve (Fed) Chairman Jerome Powell highlighted risks to the labor market due to prolonged high interest rates during his Jackson Hole speech. The GDP data, a revision of the Q2 estimate, is expected to remain steady at 2.8%. Weaker macroeconomic data could push Gold higher, as it may prompt the Fed to lower interest rates sooner than anticipated. Lower interest rates make Gold more attractive to investors since it does not yield interest.

While markets have fully priced in a rate cut from the Fed at their September 18 meeting, the magnitude of the cut remains uncertain. A 0.50% "mega cut" is still on the table, with probabilities around 34.5%, according to the CME FedWatch tool—little changed from the previous day.

Another indicator of future interest rate movements, the December 2024 Chicago Board of Trade (CBOT) fed funds future rates contract, is pricing in a total of 100 basis points, or 1.00%, of Fed cuts by the end of the year. With only three scheduled Fed meetings remaining in 2024, this suggests a 0.50% cut at one of these meetings.

Friday could prove significant for Gold, as the Fed’s preferred inflation measure, the Personal Consumption Expenditures (PCE) Price Index, is set to be released. Economists expect core PCE inflation to rise to 2.7% in July from 2.6% in June year-over-year—a result that could impact Gold prices. Higher inflation may weaken Gold, indicating that the Fed might keep interest rates elevated for longer; conversely, a lower-than-expected result could boost Gold.

A potential risk to Gold prices is the current extreme long positioning, as noted by Daniel Ghali, Senior Commodity Strategist at TD Securities, who warns that the trade is becoming overcrowded.

"Downside risks are now more potent. The ship is crowded. In fact, it has scarcely been as crowded as it is today. Do you have a slot secured on the lifeboat?" Ghali remarks.

In a follow-up note on Thursday, TD Securities announced they are taking a tactical short position in Gold, with an entry point at $2,533, a target of $2,300, and a stop loss set at $2,675.