The recent US Personal Consumption Expenditures (PCE) report has sent shockwaves across the market, particularly affecting the price of gold. Following the report, there has been a significant drop in gold prices, with it slipping below $2,500. This fall has further fueled expectations of a rate cut by the Federal Reserve in September. The Fed’s cautious approach to policy easing has added a layer of uncertainty, with most markets anticipating a 25 basis points cut. The traders’ confidence in a 25 bps rate cut has now risen to 69%, while the likelihood of a 50 bps reduction has decreased to 31%, based on the CME FedWatch Tool.
The University of Michigan’s Consumer Sentiment Index has shown a slight increase from 66.4 in July to 67.9 in August. However, inflation expectations for the next year have dipped from 2.9% to 2.8%, while medium-term expectations for the next five years have remained steady at 3%. This mixed bag of consumer sentiment and inflation expectations has added to the overall market uncertainty.
Despite the dip below $2,500, gold prices still maintain an upward bias. However, a potential ‘bearish engulfing’ chart pattern is starting to loom over the market. The Relative Strength Index (RSI) indicates that sellers are currently in control in the short term, despite showing mixed readings. In case XAU/USD closes below $2,500, the next support level would be at $2,470, followed by $2,431. On the other hand, if the price stays above $2,500, the next resistance levels would be at the all-time high (ATH) and $2,550, with potential to reach $2,600.
Gold has traditionally played a crucial role in human history, serving as a store of value and medium of exchange. Today, gold is mainly viewed as a safe-haven asset, particularly during times of economic turbulence. It is also considered a hedge against inflation and currency depreciation since it is not tied to any specific issuer or government. Central banks around the world hold significant gold reserves to boost their perceived economic strength and currency stability. In 2022, central banks added a record amount of gold to their reserves, with emerging economies such as China, India, and Turkey leading the way.
Gold prices are affected by various factors, including its inverse correlation with the US Dollar and US Treasuries, which are both major reserve assets. When the dollar weakens, gold prices tend to rise, making it an attractive diversification option for investors and central banks. Gold prices also move inversely with risk assets, with a surge in stock markets often leading to a drop in gold prices. Geopolitical tensions, fears of recession, and interest rate changes also impact gold prices significantly.
The recent US PCE report has had a profound impact on gold prices, sending them below $2,500 and raising expectations of a Federal Reserve rate cut. The outlook for gold remains uncertain, with various economic indicators and geopolitical factors playing a role in shaping its price movements. As investors and central banks navigate these volatile market conditions, gold continues to hold its position as a valuable asset for hedging against economic uncertainty.
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