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Gold bounces off key support ahead of Powell’s Jackson Hole speech

Vaseline August 23, 2024

Gold finds support from previous highs and rebounds ahead of Fed Chairman Jerome Powell’s speech.
The speech could provide insight into the outlook for Fed policy on interest rates, a key driver for gold.
Technically, XAU/USD breaks through the support and continues its uptrend, although the risks of a near-term reversal have increased.

Gold (XAU/USD) bounces past $2,490 on Friday after falling to technical support at $2,470 in the previous session. The precious metal’s recovery is being aided by a weaker US dollar (USD) – with which it is negatively correlated – and lower longer-term US Treasury yields (US 3-month bond yields are actually slightly higher at the time of publication), indicating that the market expects interest rates to fall going forward – a positive for gold as it is a non-interest-paying asset.

The overall outlook for gold remains positive ahead of the day’s main event: Federal Reserve (Fed) Chairman Jerome Powell’s speech at the central bankers’ symposium in Jackson Hole. Powell is expected to confirm market expectations that the Fed will ease rate cuts at its Sept. 18 meeting.

Gold largely supported by negative US data

Gold is trading up half a percent after losing more than 1.0% on Thursday. Gold’s previous day’s decline was helped by a drop in the probability that the Fed will cut interest rates by a bumper 0.50% in September. From a mid-30% probability, the probability fell to the mid-20% overnight, according to the CME FedWatch tool. Mixed Purchasing Manager Survey (PMI) data and jobless claims on Thursday, as well as recent cautious comments from some Fed officials, could have been a factor in the recalibration.

Preliminary data from the S&P Global Composite Purchasing Manager Index (PMI) for August – which measures activity levels in key industrial sectors – fell to 54.1 from 54.3 in July, although this was not as sharp as the drop to 53.5 that economists had expected.

The US Manufacturing PMI fell from 49.6 to 48.0, while no change was expected. Meanwhile, the services sector rose from 55.0 to 55.2, while a drop to 54.0 was forecast.

Jobless claims were mixed, with initial jobless claims rising to 232,000 — slightly above the previously upwardly revised 228,000 and estimates of 230,000 — but continuing claims were marginally lower than expected but still higher than previously expected.

Technical Analysis: Gold Pulls Back to Top of Old Range and Rebounds

Gold (XAU/USD) is correcting back down to support at the top of its old range, using it as a springboard for a recovery on Friday. Despite recent weakness, the short-term trend remains bullish. Given that “the trend is your friend,” this continues to favor longs over shorts.

XAU/USD Daily Chart

The range breakout on August 14 generated an upside target of around $2,550, calculated by taking the 0.618 Fibonacci ratio of the range high and extrapolating it upwards. This target is the minimum expectation for a follow-through after a breakout based on principles of technical analysis.

However, a break within the range could negate the projected upside target. Such a move would be confirmed by a close below $2,470 (low on August 22). It would change the picture for gold and put the short-term uptrend in doubt.

However, gold is in a broad uptrend over the medium and long term, further supporting the overall positive outlook for the precious metal.

Frequently Asked Questions About Gold

Gold has played an important role in human history, as it has been widely used as a store of value and medium of exchange. Today, aside from its luster and use in jewelry, the precious metal is widely seen as a safe haven, meaning it is considered a good investment in turbulent times. Gold is also widely seen as a hedge against inflation and depreciating currencies, as it is not dependent on any specific issuer or government.

Central banks are the largest holders of gold. To support their currencies during turbulent times, central banks tend to diversify their reserves and buy gold to improve the perceived strength of the economy and its currency. High gold reserves can be a source of confidence in a country’s solvency. Central banks added 1,136 tons of gold worth about $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest annual purchase since records began. Central banks from emerging economies such as China, India and Turkey are rapidly increasing their gold reserves.

Gold has an inverse correlation with the US dollar and US Treasuries, both of which are important reserve and safe haven assets. When the dollar depreciates, gold tends to rise, allowing investors and central banks to diversify their assets during turbulent times. Gold is also inversely correlated with risky assets. A rally in the stock market tends to weaken the price of gold, while sell-offs in riskier markets tend to favor the precious metal.

The price can change due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly send the price of gold soaring due to its safe-haven status. As a low-yielding asset, gold tends to rise at lower interest rates, while a higher cost of money tends to weigh on the yellow metal. However, most movements depend on how the US dollar (USD) behaves, since the asset is priced in dollars (XAU/USD). A strong dollar tends to keep the price of gold in check, while a weaker dollar is likely to push the gold price higher.