Gold prices initially rose but later fell on Friday after the release of higher-than-expected US PMI data, which indicated strong activity levels in both manufacturing and services sectors in June. This suggests that inflation and interest rates may remain higher for longer than anticipated. The XAU/USD pair broke above key resistance levels, invalidating a bearish Head-and-Shoulders pattern on the daily chart.
The release of US PMI data led to a sell-off in gold, with the metal dropping to the mid $2,330s. Higher PMIs suggest that inflation could remain elevated, causing the US Federal Reserve to delay interest rate cuts, which could impact the price of gold. Lower interest rates are generally positive for gold as they reduce the opportunity cost of holding the metal compared to other assets like bonds. Therefore, any delay in interest rate cuts could weigh on gold prices.
Gold prices are also supported by central bank buying, with a survey conducted by the World Gold Council indicating that 81% of reserve managers expect central banks to increase their holdings in 2024, the highest percentage since the survey began in 2019. Asian central banks, in particular, are hoarding gold as a hedge against a strengthening US dollar, especially as the Fed has scaled back expectations of interest rate cuts for 2024. The trend of using gold as a buffer against the dollar’s strength has been intensified by the growing divide between BRICS nations and the West.
The split between the BRICS and the West has been fueled by geopolitical conflicts such as Russia’s invasion of Ukraine and Israel’s war against Hamas, leading to a shift in world trade dynamics. This has increased demand for gold as a potential medium of exchange and safe-haven asset. The uncertainty surrounding these conflicts is likely to continue driving demand for gold in the future.
In terms of technical analysis, gold broke above key resistance levels, including the 50-day Simple Moving Average and a trendline connecting previous highs. This breakout invalidated a bearish Head-and-Shoulders pattern on the daily chart, suggesting a potential bullish continuation. Gold’s follow-through higher is expected to target the mid $2,380s initially, with further upside potential towards the May and all-time high at $2,450. A break above this level would confirm a resumption of the broader uptrend in gold prices.
