Fundamental Analysis

Gold Prices Rebound 1% After Deeper Retracement Under $2,330

  • Gold prices plunged last week after data from the US showed a robust economy.
  • US  PMI data revealed that manufacturing input prices increased.
  • The US core PCE price index will show the state of underlying inflation.

Gold prices rose by 1% on Monday after reaching a two-week low in the previous session. The rally came amid a pullback in the dollar and Treasury yields as investors geared up for more clues about Federal Reserve rate cuts.

However, the general trend remained down, with prices well below recent highs due to a decline in Fed rate cut expectations. Gold prices plunged last week after data from the US showed a robust economy, raising doubts about Fed rate cuts. 

At the same time, the dollar rallied, making the yellow metal expensive for foreign buyers and reducing demand. Meanwhile, a similar rally in Treasury yields reflected interest rate expectations, increasing the opportunity cost of holding non-yielding gold. 

Data from last week revealed better-than-expected business activity in the US. A strong economy shows that demand remains robust despite high interest rates. Therefore, the Federal Reserve still has work to do to lower demand and inflation.

Notably, policymakers have expressed doubts about expectations that inflation is back on a downtrend. Most have maintained a cautious stance and are waiting for more evidence of lower price increases. However, so far, indicators are showing that prices might remain high. The PMI data revealed that manufacturing input prices increased.  This could lead to higher prices for goods in the coming months, driving inflation. As long as inflation remains stubborn, there is always a risk that the Fed could hike interest rates. 

The FOMC meeting minutes released last week revealed that policymakers were ready to hike interest rates if inflation remained stubborn. Such a possibility puts much pressure on gold, a non-yielding asset. The next major report is the US Core PCE Price Index, which will show the state of underlying inflation. Economists expect the figure to remain steady from last month.

China gold reserves (Source: PBOC, Bloomberg)

China gold reserves (Source: PBOC, Bloomberg)

Nevertheless, the yellow metal has gained about 13% this year due to solid demand from China and geopolitical tensions. Moreover, China’s central bank has kept buying gold to diversify its holdings. 

However, as these factors slowly decrease, the focus returns to Fed rate cuts. China is working hard to support its fragile economy, boosting investor confidence. Meanwhile, tensions in the Middle East have eased significantly. Although the war continues, the risk of an escalation has dropped, reducing safe-haven demand for gold.