Expectations for gold prices amid a risk

23 Temmuz 2024

Today’s market analysis on behalf of Rania Gule Market Analyst at XS.com

Expectations for Gold Prices Amid a Risk-Averse Environment Following Biden’s Withdrawal

Gold prices (XAU/USD) rose for a while at the start of the trading week on Monday to around $2410 before falling back to $2394. I can say that these early rises were due to political uncertainty in the United States following a report that President Joe Biden withdrew from the U.S. presidential race.

President Joe Biden announced on Sunday that he would end his re-election campaign and will speak to the nation later this week with more details on his decision, which is expected to increase market volatility. With uncertainty about who the candidate will be, investors will seek a haven until they can assess whether Biden’s alternative will persist or whether there will be more regulation and more of Biden’s administration’s interventionist policies in the near term.

Additionally, the worrying economic situation in China, the world’s second-largest economy, supports the rise in gold prices. Chinese hedge funds, worth $715 billion, are under renewed pressure due to stricter regulatory rules that will take effect next month, pushing some investment firms to seek additional funding. New retail market principles, effective from August 1st, will impose higher asset values for funds, as well as stringent investment and marketing rules, potentially supporting medium-term price increases.

On the other hand, I believe that dovish comments from Federal Reserve officials and increasing chances of interest rate cuts in September failed to boost gold prices on Friday. The International Monetary Fund (IMF) said last week that the Federal Reserve should not cut interest rates until late 2024. Now, in my view, investors will watch U.S. economic data this week. The global PMI and the preliminary U.S. GDP for Q2, along with the PCE Price Index, will be the most important data this week. Stronger-than-expected readings could dampen hopes for a Fed rate cut this year, thus halting the rise in gold prices.

President Joe Biden’s exit from the presidential race has also led some investors to unwind trades betting on Trump’s victory. This keeps U.S. dollar bulls on the defensive and provides some support for dollar-denominated commodities.

Moreover, concerns about slowing economic growth in China, geopolitical risks from the prolonged Russia-Ukraine war, and ongoing conflicts in the Middle East strengthen gold’s appeal as a haven. However, gold lacks continuous buying strength as traders await key U.S. inflation data this week for clues on the Fed’s policy trajectory, which will determine gold’s near-term non-yielding path.

Currently, the price of gold (XAU/USD) has slightly fallen below the key support level at $2400 in New York’s session on Monday. This drop, despite Vice President Kamala Harris’s nomination to lead the Democrats against the Republicans led by Donald Trump, deepens political uncertainty in the U.S. Historically, investors turn to gold as a hedge against political uncertainty.

In my view, this has caused the U.S. dollar’s rally to pause for a while this morning, with the U.S. Dollar Index (DXY) slightly falling to 104.20 after a strong rebound from a four-month low of 103.65. However, the higher probabilities of Trump’s election victory have supported the U.S. dollar’s recovery. Markets view Trump’s victory as a death to economic growth as he promised corporate tax cuts and lower interest rates. This has fueled upside risks to consumer inflation expectations, aside from the potential for more trade restrictions under Trump.

Meanwhile, U.S. 10-year Treasury yields fell to 4.22%. Lower yields on interest-bearing assets reduce the opportunity cost of investing in non-yielding assets like gold. This comes as the market has fully priced in a Fed rate cut in September, contributing to the weaker U.S. dollar and supporting gold prices. But by the end of the week, the main market driver will be U.S. inflation data, which in turn will drive demand for the U.S. dollar in the near term and provide new directional momentum for commodities and gold if it comes in stronger than expected.

 

Zaid Barem / YMM