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Gold Prices Bounce Likely Short-Lived As US Rates, China Import Move Both Weigh

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GOLD ANALYSIS & TALKING POINTS

  • Gold prices bounced in early Friday trade
  • Action looks corrective after heavy falls, doesn’t seem backed by a specific event
  • US PCE inflation numbers will be the next big indicator

Recommended by David Cottle

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Gold Prices managed a little bounce in Friday’s European trade but remain on course for their worst monthly showing since February of this year as a range of fundamental and technical factors make life very tough for the bulls.

As always these days, the most obvious of those factors is monetary. United States interest rates are set to remain ‘higher for longer’ as the Federal Reserve battles inflation. The latest data suggest it seems to be winning the fight, but there’s no sign of any premature retreat from the field. Indeed, the markets’ base case is that rates will rise by another quarter-percentage-point this year and probably remain above 5% for all of next.

Other central banks are also apparently set to keep their benchmark rates around current levels. Given that, it’s not difficult to find some comparatively tempting risk-free yields in the government bond markets. Of course holding gold yields you nothing, and usually incurs costs, so it’s not hard to see why investors might exit their metal holdings in favor of paper.

The general strength of the US Dollar has been a great feature of the foreign exchange market this year. But that very strength makes Dollar-denominated gold and gold proxies more expensive for those forced to buy them with other currencies.

China Acts To Curb Local Gold Premium

There was some more bad news for gold on Friday as Beijing reportedly opened the door to more gold imports. That move saw Chinese gold prices fall the most in one day since 2020 as the premium on an ounce of gold in China slipped dramatically. From as high as $120 per ounce, that premium slipped to $10. Chinese investors have been very keen to hold gold in the face of strong, specific headwinds in other domestic investment markets- most notably real-estate which had been a previously enticing investment option.

As these headwinds aren’t abating, China looks likely to remain a bright spot for the gold market, but Beijing’s actions have certainly dimmed that light a bit.

Another bright spot could be further signs that inflation in the US is relaxing its grip. Should those start to see intertest-rate forecasts reassessed, and the possible timing of rate cuts brought forward, gold would likely stand to benefit.

The markets will get another important look at US price pressures later in the session with the release of August inflation numbers in the Personal Consumption and Expenditure series. This is known to be one of the Fed’s own preferred indicators, so it will surely draw a crowd.

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Gold Prices Technical Analysis

Chart Compiled Using TradingView

A broad meander lower from May’s peaks well above the psychological $2000 mark has become something more urgent in the last two weeks, with gold sliding below the 200-day moving average which had been very closely watched.

Even so, prices are still slightly higher than they were at the start of this year, even if that state doesn’t seem very likely to last. The last three days’ heavy declines have seen support give way at the last significant low, which was August 21’s intraday low of $1884.52.

Prices have also fallen below the second Fibonacci retracement of the rise up to those May peaks from the lows of November last year. That came in at $1893.52, and was broken below on Wednesday. Focus is now back on the broad trading band from the period between February 10 and March 9 into which prices have now retreated. That contains the third retracement at $1840.66, which may struggle to contain the bears in the event that key support around $1850 decisively gives way.

Bulls will hope to keep the market above that point to avoid further, likely deeper falls.

–By David Cottle for DaiyFX.

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