The yellow metal’s pullback looks strange amid the market’s confidence about the Fed’s upcoming rate cuts. Could gold just be dropping insecure buyers? Let’s discuss it and make a trading plan for XAUUSD.
The article covers the following subjects:
Highlights and key points
- Strong US GDP data accelerated the precious metal’s pullback.
- A decrease in Chinese demand drives the downward trend in the XAUUSD.
- Regardless of who becomes the American president, gold will win.
- A return above $2,410 per ounce will not be the only reason for buying gold.
Weekly fundamental forecast for gold
What’s happening to gold? A week ago, it reached a record high as the derivatives market’s confidence in the start of the Fed’s monetary expansion in early autumn had grown to 100%. However, the precious metal pulled back instead of continuing the rally even though CME derivatives increased the odds of a 50 bp rate cut by September to 20%! Moreover, the decrease in the probability of that outcome to 10% after the release of US GDP data dropped the XAUUSD quotes even lower.
In the second quarter, the US economy accelerated to 2.8% and PCE to 2.9%, which, in theory, should allow the Fed not to hurry to ease policy. That puts pressure on gold. However, the cooling of the labor market and inflation began to take effect in May-June, so the central bank will unlikely give up the idea of cutting rates in September. If so, the capital inflow into gold ETFs looks logical, and the XAUUSD’s pullback is temporary.
Capital flows in gold ETFs
Source: Bloomberg.
The correction from record highs could be driven by weaker demand in China and the collapse of US stock indices that had pushed speculators to drop gold to support their positions in tech stocks. That has already happened before: in July-October 2023, the S&P 500‘s pullback was accompanied by the XAUUSD‘s fall amid unmet expectations of the Fed’s dovish turn.
Demand for gold leaves much to be desired despite the slowdown in the Chinese economy, reflected not only in disappointing statistics but also in the extraordinary rate cut by the People’s Bank. The PBoC has refused to purchase gold to increase reserves for the second month in a row, imports from Hong Kong in June fell by 18% m/m, and the difference in prices in Shanghai and London became negative for the first time in a year.
Shanghai and London gold price gap
Source: Bloomberg.
I don’t think China has turned away from the precious metal as the bipolar world and dedollarization have not been canceled. At the same time, the growth of demand in the US and Europe suggests that the correction of XAUUSD is temporary. Indeed, gold will win regardless of who becomes the next American president.
Under Kamala Harris, the Fed will be able to cut rates with a clear conscience, which will weaken the greenback. The Donald Trump administration will pursue a weak dollar policy. That will require currency interventions and put political pressure on the Fed, which is fraught with turmoil in financial markets and a flight to safe-haven assets, including precious metals.
Weekly trading plan for gold
Thus, the ongoing pullback is an excellent opportunity to buy gold cheaply. A rebound from support at $2335 and $2280 or a return above resistance of $2410 an ounce will be a foundation for going long.
Price chart of XAUUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
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