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Gold prices plummet amid strong dollar and economic data

Gold prices plummet

On Friday, the price of gold experienced its largest drop since June 7, influenced by a stronger dollar and rising bond yields following data from the USA showing strong economic activity. This sharp decline in gold prices can be attributed to several key economic indicators and market reactions. A stronger dollar generally makes gold, which is priced in dollars, more expensive for holders of other currencies, thereby reducing demand.

Additionally, rising bond yields offer investors an alternative safe haven with the added benefit of yielding interest, unlike gold, which does not provide any yield. The economic data from the USA that indicated robust economic activity further fueled these trends, leading to a sell-off in gold. This significant drop has also revived concerns about the formation of a supply-side head and shoulders pattern in the gold market, which is a bearish technical indicator suggesting further declines may be on the horizon. This pattern is particularly watched by traders and analysts as it often precedes a market downtrend.

The price of gold fell by 1.6% to $2,322 per ounce on Friday, marking a substantial decrease in value. During the same period, silver also saw a notable decline, decreasing by 3.9% to $29.54 per ounce. These sharp declines in both gold and silver reflect broader market sentiments and investor behavior influenced by the current economic climate. Gold and silver, often considered safe-haven assets, tend to perform poorly when investor confidence in the economy is high and interest rates are rising.

The decline in prices highlights the shifting preference of investors who might be moving their capital into higher-yielding assets, given the current economic data and market conditions. This sell-off can also be seen as part of a broader trend where precious metals are losing their appeal in the face of strengthening currencies and rising bond yields.

This likely reflects the market's reaction to increased interest rates and a persistently strong dollar, driven by recent economic data. As central banks, particularly the Federal Reserve, increase interest rates to combat inflation, the cost of holding non-yielding assets like gold rises. Higher interest rates typically lead to a stronger dollar, as investors seek higher returns from dollar-denominated assets. The persistently strong dollar has been a significant factor in the decline of gold prices, as it makes gold more expensive and less attractive to international buyers.

This relationship between interest rates, currency strength, and commodity prices is a fundamental aspect of financial markets, affecting investor behavior and asset allocation. The strong economic data from the US, indicating robust growth and lower unemployment, further supports the Fed's stance on maintaining or even increasing interest rates, thereby reinforcing the dollar's strength and putting additional pressure on gold prices.

On Friday, S&P Global reported an increase in the preliminary PMI for the manufacturing sector, rising to 51.7 from May’s level of 51.3. This growth exceeded economists' expectations, who had predicted a more neutral value of 51.0. The PMI, or Purchasing Managers' Index, is a key economic indicator that reflects the health of the manufacturing sector. A reading above 50 indicates expansion, while a reading below 50 indicates contraction. The higher-than-expected PMI suggests that the manufacturing sector is growing at a faster pace than anticipated, which is a positive sign for the overall economy.

This robust growth in manufacturing is likely contributing to the stronger dollar and higher bond yields, as it signals continued economic recovery and expansion. Investors and analysts closely monitor PMI data as it provides insights into economic trends and potential future movements in markets.

The services PMI also saw an increase, rising in June to 55.1 from 54.8 in May, contrary to predictions of a slight decline to 53.4. This marks the highest level of activity in the services sector in 26 months. The services sector, which includes industries such as finance, healthcare, and retail, is a significant component of the overall economy. The unexpected increase in the services PMI indicates that this sector is performing exceptionally well, further bolstering economic confidence.

The services sector's strength is crucial as it drives consumer spending and employment, both of which are key drivers of economic growth. This positive data from the services sector adds to the overall positive economic outlook, supporting the case for higher interest rates and a stronger dollar, which in turn puts pressure on gold prices.

Additionally, Thursday's data showed a moderate decrease in the number of jobless claims in the US, further strengthening economic prospects. Lower jobless claims indicate a healthier labor market, which is a critical component of economic stability and growth. A strong labor market boosts consumer confidenceand spending, which drives economic activity. The decrease in jobless claims adds to the positive economic sentiment, suggesting that the recovery from the pandemic-induced recession is ongoing and robust.

This further supports the case for higher interest rates, as the Federal Reserve aims to manage economic growth and control inflation. The improving labor market data contributes to the overall narrative of a strong US economy, which is a key factor in the rising bond yields and stronger dollar, both of which negatively impact gold prices.

The dollar rose by 0.2%, reaching its highest level in over seven weeks, negatively affecting precious metals. At the same time, the yield on 10-year US Treasury bonds increased following positive data from the US. The strengthening of the dollar and rising bond yields are interrelated phenomena. As the dollar strengthens, it becomes more attractive to investors, driving up demand and value.

Simultaneously, positive economic data leads to higher bond yields as investors anticipate higher interest rates. Higher bond yields provide a more attractive investment alternative to gold, which does not offer any yield. This dynamic puts downward pressure on gold prices, as investors shift their portfolios towards higher-yielding assets. The rise in the 10-year Treasury bond yield is particularly significant as it is a benchmark for other interest rates and reflects investor confidence in the economy's future performance.

Investors currently see a 63% chance of an interest rate cut by the Fed in September, which has changed little since late Thursday, according to the CME FedWatch tool. The CME FedWatch tool is widely used by investors and analysts to gauge market expectations for future Federal Reserve policy actions. The probability of an interest rate cut or hike can significantly impact financial markets, including the gold market. The current expectation of a 63% chance of an interest rate cut suggests that while there is some anticipation of easing, it is not the dominant expectation.

This relatively stable expectation reflects the market's assessment of current economic conditions and the Fed's likely response. The Fed's policy decisions are crucial for financial markets, influencing everything from currency values to bond yields and commodity prices. The anticipation of future rate cuts or hikes can lead to significant market movements as investors adjust their strategies based on expected changes in monetary policy.

Gold's downward trend resumed on Friday after buyers tested the head and shoulders pattern, pushing the XAU/USD rate above the neckline of this formation. Despite achieving a daily close above this line, sellers defended the neckline and pushed the spot price to a new three-day low of $2,316. The head and shoulders pattern is a well-known technical analysis pattern that signals a potential reversal in the market trend. It is characterized by three peaks, with the middle peak (the head) being higher than the other two (the shoulders).

The neckline forms the support level, and a break below this line typically signals further declines. In this case, despite an attempt by buyers to push prices higher, sellers successfully defended the neckline, leading to renewed downward pressure on gold prices. This technical pattern is closely watched by traders as it provides insights into potential future price movements.

That said, the path of least resistance is downward. The next support level is $2,300. If it breaks, XAU/USD will drop to $2,277, the low from May 3, and then to the March 21 high of $2,222. Further losses lie below, with sellers targeting the head and shoulders pattern's goal, between $2,170 and $2,160. Technical analysis plays a crucial role in financial markets, providing traders with insights into potential support and resistance levels.

These levels are critical as they indicate points where the price might reverse or continue its trend. The identified support levels at $2,300, $2,277, and $2,222 are key areas where buyers might step in to prevent further declines. However, if these levels are breached, it signals stronger bearish momentum, potentially driving prices lower towards the head and shoulders pattern's target range of $2,170 to $2,160. This analysis helps traders make informed decisions, balancing between technical signals and broader market fundamentals.

gold trading
XAU/USD daily chart, MetaTrader, 22.06.2024

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