Market Analysis

Gold extends its mini-range following robust US data that limits upside

Amos Simanungkalit · 30 Aug 2024149.9K Views

Gold (XAU/USD) displayed mixed trading on Friday, gradually climbing to the $2,520s during the European session. The precious metal started the day on a downward note as positive sentiment took hold following unexpectedly strong US economic data, which alleviated concerns about a potential hard landing for the economy.

Gold Remains Range-Bound After US Data

Gold remains under key resistance at $2,531, the August peak and new all-time high, after Thursday’s US data showed an upward revision in annualized Gross Domestic Product (GDP) growth for Q2, from 2.8% to 3.0%. Additionally, a slight decrease in Initial Jobless Claims below expectations helped ease worries about a recession in the US economy.

The data suggests that the Federal Reserve (Fed) might adopt a more gradual approach to interest rate cuts, though markets still anticipate about 100 basis points (1.00%) of reductions by year-end. Lower interest rates are generally favorable for Gold, as they reduce the opportunity cost of holding a non-yielding asset, making it more attractive to investors.

China's Influence on Gold Price Outlook

Gold received some support following a report from the World Gold Council (WGC) on Tuesday, which revealed a 17% increase in Chinese Gold imports in July, marking the first rise since March. Additionally, North American funds reported a modest increase in net inflows of 8 metric tons ($403 million) last week, according to the WGC.

The long-term outlook for Chinese demand remains positive, as a slowing economy could drive investors and the People's Bank of China (PBoC) to increase their Gold reserves. Currently, China's Gold reserves are relatively low compared to other countries (3% versus 9% for India, for example). Efforts by BRICS countries to reduce reliance on the US dollar, with Gold as a potential replacement, could further boost long-term demand.

However, Capital Economics cautions against short-term expectations of increased demand from China. They anticipate weaker gold demand in the near term due to higher prices impacting jewelry consumption, fiscal stimulus expected to boost the economy, and potential improvements in stock market performance as local equities appear undervalued.

Upcoming Data and Market Risks

Traders are awaiting the release of the Fed’s preferred inflation measure, the Personal Consumption Expenditures (PCE) Price Index. Economists forecast the core PCE inflation gauge to rise to 2.7% in July from 2.6% in June year-over-year. Any deviation from this estimate could influence Gold prices significantly: higher inflation may prompt the Fed to maintain elevated interest rates for a longer period, while lower-than-expected inflation would have the opposite effect.

Another concern for Gold in the near term is the high level of long positions in the derivatives market. According to Daniel Ghali, Senior Commodity Strategist at TD Securities, the long trade is currently overcrowded, posing increased downside risks.

“Downside risks are now more pronounced. The trade is overcrowded, and it has rarely been as crowded as it is today. Do you have a spot on the lifeboat?” Ghali commented.

On Thursday, TD Securities announced a tactical short position in Gold, setting an entry point at $2,533, a target at $2,300, and a stop loss at $2,675.