Gold prices decreased as US economic data and trade agreements reduced demand for safe-haven assets, placing downward pressure on the yellow metal. Gold traded at $3,336, marking a nearly 1% decline.
The Federal Reserve plans to maintain rates at 4.25%-4.50% for the fifth time, following a decline in Initial Jobless Claims over four consecutive weeks, signalling labour market resilience. However, Durable Goods Orders fell due to reduced aircraft orders.
Us And Japan Trade Agreement
The US and Japan have reached a trade agreement, with potential talks involving the EU, while the US Dollar recovered from a two-week low, affecting Gold’s affordability for foreign buyers. Next week, key economic events include the Fed’s decision, GDP data, and Nonfarm Payroll figures.
US Treasury yields and real yields decreased, with the 10-year note dropping three basis points. Core Durable Goods Orders showed minor growth, suggesting underlying business investment strength. The Fed is likely to hold rates steady, with a 96% probability according to rate forecasts.
Gold’s price dropped below $3,350, approaching the $3,320 area, with its RSI turning bearish. Central banks, major Gold holders, have been increasing reserves, particularly in emerging economies. Gold remains a hedge against economic instability and currency depreciation.
Given the downward pressure on the yellow metal, we see the resilient labor market as a primary headwind. The addition of 272,000 jobs in May, crushing expectations, confirms the economic strength that lessens the immediate need for safe-haven assets. This suggests further weakness or consolidation is more likely than a significant rally in the short term.
Us Dollar Recovery
The recovery of the US Dollar, with the Dollar Index (DXY) recently firming above the 105 level, will continue to make gold more expensive for holders of other currencies. We believe this relationship will be a key factor, as the Federal Reserve’s cautious stance on rate cuts contrasts with potential easing from other central banks like the ECB. This policy divergence should keep the dollar well-supported.
While Treasury yields have seen daily fluctuations, the fact that the 10-year note remains elevated, currently around 4.4%, presents a significant opportunity cost for holding a non-yielding asset. For as long as investors can get a respectable, risk-free return from bonds, the appeal of bullion is diminished. We are positioning for this dynamic to cap any near-term price advances.
In response, we are considering purchasing put options or establishing bear put spreads to hedge against a potential drop towards the next major support level around $2,300 per ounce. This strategy allows for profiting from a decline while strictly defining our maximum risk. The bearish signal from the RSI indicator mentioned supports this tactical, short-term negative view.
However, we are also closely monitoring the significant and ongoing purchases from central banks, which provides a strong underlying floor for prices. The World Gold Council reported that central banks added a net 290 tonnes in the first quarter of 2024, demonstrating robust strategic demand. This institutional buying is likely to prevent a dramatic price collapse.
Looking forward, our focus will be on incoming inflation data and the central bank’s commentary. Historically, gold prices have bottomed and started sustained rallies in anticipation of, or at the beginning of, a Fed rate-cutting cycle. We will therefore use any further price weakness as an opportunity to build longer-term bullish positions through long-dated call options, preparing for an eventual policy pivot.
