Gold prices (XAU/USD) faced a sharp decline to around $2,400 during Monday’s European session, succumbing to profit booking after nearing its all-time highs above $2,480. Despite this drop, the overall outlook for gold remains strong as U.S. bond yields hit fresh annual lows.
Though analysts noted that bullion’s attractiveness as a safe haven remained intact as concerns about a U.S. recession increased, gold prices fell more than 2% on Monday in chaotic trading as investors liquidated positions in concert with a larger markets selloff. As of 11:39 GMT, spot gold was down 2% at $2,393.66 an ounce. Gold futures in the US fell 1.4% to $2,434.10. A day earlier!
The 10-year U.S. Treasury yields fell to 3.67%, driven by growing speculation that the Federal Reserve (Fed) will implement rate cuts in September. The decline in bond yields, which offer interest income, makes gold—a non-yielding asset—more attractive by reducing its opportunity cost. Meanwhile, the U.S. Dollar Index (DXY), which measures the Greenback against six major currencies, slipped to its lowest level since March, reaching around 102.60.
Federal Reserve Rate Cut Speculations Grow
According to the CME FedWatch tool, traders see a 50-basis point (bp) cut in the Fed’s interest rates in September as likely, with the possibility of more than 100 bps cuts throughout the year. This speculation has been fueled by a series of weak economic data from the United States, raising concerns about a potential economic slowdown and casting doubt on the Fed’s ability to achieve a “soft landing.” A soft landing would involve curbing inflation without triggering a recession.
U.S. Economic Data and Its Impact on Gold
The July Nonfarm Payrolls (NFP) report highlighted a significant slowdown in labor demand, with fresh payrolls at 114,000, well below the 175,000 expected and the previous month’s 179,000. The unemployment rate unexpectedly rose to 4.3%, the highest since November 2021. Additionally, the ISM Manufacturing Purchasing Managers Index (PMI) contracted further, dropping to 46.8 in July, reflecting a sharp slowdown in the manufacturing sector.
Global Economic Concerns
Gold’s recent performance reflects broader concerns about the global economy. Geopolitical tensions in the Middle East have escalated, with Iran-backed Hezbollah launching missiles at Israel in retaliation for the assassination of Hamas leader Ismail Haniyeh by an Israeli airstrike. Historically, such tensions have increased gold’s appeal as a safe-haven asset.
Moreover, the global demand environment is under strain due to high interest rates imposed by central banks. China, the world’s second-largest economy, is grappling with weak domestic and international demand, as reflected in the Caixin Manufacturing PMI, which contracted to 49.8 in July. In the Eurozone, Germany’s economic challenges have prompted tax relief measures, while the U.S. economy’s slowing growth has further heightened global slowdown fears.
Market Focus: U.S. ISM Services PMI
Investors will be closely monitoring the U.S. ISM Services PMI for July, scheduled for release at 14:00 GMT on Monday. The report is expected to show a recovery in the services sector to 51.0 after contracting to 48.8 the previous month. Attention will also be on related indices, such as Prices Paid and New Orders, which provide insight into input prices and forward demand, respectively.
Technical Analysis: Gold Price Trends
Gold prices are oscillating within Friday’s trading range, moving in a channel formation on a daily timeframe. The 50-day Exponential Moving Average (EMA) near $2,370 continues to provide support, maintaining a slightly rising but broadly sideways performance for over three months. The 14-day Relative Strength Index (RSI) remains between 40.00 and 60.00, indicating market indecision.
A breakout above the all-time high of $2,483.75 could propel gold into uncharted territory. However, on the downside, the upward-sloping trendline at $2,225, drawn from the October 6 low of $1,810.50, will serve as major support in the longer term.
