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Gold surges to six-week high on weak US labour market data

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  • Gold prices jumped more than 1% to $2,385 on mixed US NFP data and growing expectations of a Fed rate cut.
  • While the June NFP beat expectations, revisions for April and May suggested the labor market is cooling at an accelerating rate.
  • The US Dollar Index (DXY) fell 0.16% to 104.95, while the 10-year Treasury yield fell more than six basis points to 4.284%.

Gold prices rose in mid-North America after the June U.S. non-farm payrolls (NFP) data beat expectations, but downward revisions over the past two months suggest the labor market is cooling faster than the numbers suggest. That has traders expecting the Federal Reserve to cut interest rates in September, creating a headwind for the dollar and a tailwind for gold.

XAU/USD is trading at $2,391, recording a gain of over 1.40% in a day and over 2.70% in a week, partly due to a weakening US dollar weakened by falling US Treasury yields.

The US Dollar Index (DX) fell 0.16% to 104.95, while the benchmark 10-year US Treasury yield fell more than 6 basis points (bps) to 4.284%.

US NFP came in strong in June, but data for April and May were revised downwards, suggesting that 111,000 fewer jobs were created than reported in those two months. As a result, the unemployment rate rose 10 percentage points in June, above consensus.

Other data from the U.S. Bureau of Labor Statistics (BLS) revealed that average hourly earnings (AHE) were flat month-over-month but down year-over-year.

Beyond this, geopolitics continued to play a key role in gold’s movements. Israeli Prime Minister Benjamin Netanyahu sent a delegation to continue negotiations on the hostage issue and reiterated that the war would not end until Israel has achieved all of its objectives. Meanwhile, according to CNN, Hamas leaders said they were waiting for a positive response from Israel to begin negotiations on the details of the agreement.

Daily Digest Market Trends: Gold prices rise following US NFP

  • U.S. nonfarm payrolls rose by 206,000, beating the 190,000 expected, but the April and May figures were revised down to 108,000 and 218,000, respectively.
  • Average hourly earnings (AHE) decreased from 4.1% to 3.9% year-over-year, in line with expectations, while the unemployment rate increased from 4% to 4.1%.
  • On Wednesday, the Federal Open Market Committee (FOMC) released the minutes of its June meeting, which showed that most participants assessed current policy as tight but left room for rate hikes open. Policymakers acknowledged that the economy was cooling and that they could react to an unexpected weakening of the economy.
  • There is a 70% chance that the Fed will cut rates by 25 basis points in September, up from 66% on Thursday, according to the CME FedWatch tool.
  • The December 2024 federal funds rate futures contract suggests the Fed will ease policy by 40 basis points (bps) toward the end of the year.

Technical analysis: Gold price surpasses head and shoulders neckline, heading for $2,400

Gold prices have firmly broken out of the Head and Shoulders neckline, pushing the spot price towards the $2,390 region, indicating that bulls have the upper hand and prices are likely to rise.

Momentum is in favor of the buyers, as indicated by the bullish relative strength index (RSI). A close above the June 21 high of $2,368 could open up a higher trading range between $2,370 and $2,400 as buyers seek higher prices.

If the price rises above $2,400, it will reach a year-to-date high of $2,450 before challenging $2,500.

On the other hand, if sellers push the spot price below $2,350, a further decline could target the $2,300 level. If this support fails, the next demand zone would be the May 3 low of $2,277, followed by the March 21 high of $2,222.

Gold FAQ

Gold has played a vital role throughout human history, as it has been widely used as a store of value and a medium of exchange. Today, apart from its luster and use in jewellery, the precious metal is widely recognised as a safe haven asset and considered a good investment during volatile times. Gold is also widely seen as a hedge against inflation and currency depreciation, as it is not dependent on any particular issuer or government.

Central banks are the largest holders of gold. To support their currencies in times of uncertainty, central banks tend to buy gold to diversify their reserves and to impress upon them the strength of their economies and currencies. Large gold reserves can be a source of confidence in a country’s solvency. According to data from the World Gold Council, central banks added 1,136 tonnes of gold worth about $70 billion to their reserves in 2022, the highest annual purchase since records began. Central banks in emerging countries such as China, India and Turkey are rapidly increasing their gold reserves.

Gold is inversely correlated with the US Dollar and US Treasury Bonds, which are the primary reserve and safe haven assets. When the US Dollar falls, gold tends to rise, allowing investors and central banks to diversify their assets during volatile times. Gold is also inversely correlated with risk assets. Rising stock markets tend to drive gold prices down, while sell-offs in risky markets tend to favor the precious metal.

Gold prices fluctuate due to a variety of factors. Geopolitical instability or fears of a deep recession can send gold prices soaring due to gold’s status as a safe haven. As a non-yielding asset, gold tends to rise in value the lower interest rates are, but rising cost of funds typically weighs on gold. Still, since the asset is priced in dollars (XAU/USD), most of the movement is determined by the movement of the US Dollar (USD). A strong dollar tends to keep gold prices in check, while a weak dollar can boost gold prices.

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