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For three consecutive trading sessions, the XAU/USD gold price moved amid a rebound to the upside, with gains that affected the $1975 resistance level, before settling around the $1960 level, at the time of writing. The market recovered from strong selling operations, as a result of which it moved towards the $1932 support level. The US dollar’s gains stopped temporarily, helping gold prices to recover.
- According to the trading, the XAU/USD gold price fell to a low of $1940 an ounce this week.
- This was after reaching its highest level in a year so far at $2.056 in early May.
- The decline was attributed to the calming of the banking crisis, the progress in the US debt ceiling talks, the strength of the US dollar, and the rise in inflation indicators recently.
All of these factors have seen US Treasury yields rise by up to 10 percent since May 1, and given that gold prices and interest rates have an inverse relationship, gold has behaved as we expected over the past month. Even with the recent decline, gold prices have increased significantly over the past six months, and for the third time since 2020, gold rose above $2,000 an ounce, then fell back from it.
Let’s take a look at the current factors affecting the gold market and their relationship to the future price of gold in the coming period.
It looks like the US government has a deal to raise the debt ceiling before the June 1 deadline. (Raising the debt ceiling is the government’s legal authority to increase total outstanding debt and allow it to issue more debt.) Markets didn’t expect a default, but predicted that talks could have dragged on to the deadline, causing investors to ramp up interest in gold as the date nears. Final.
The yield curve on US Treasury bonds is currently inverted, which means that short-term interest rates are higher than long-term interest rates. Since World War II, every inversion of the yield curve has been followed by a recession in the next six to eighteen months. The 2-year and 10-year Treasury yields reversed in July 2022 (10 months earlier) and the spread widened in the last month (the 2-year yield was rising faster than the 10-year yield). Gold prices tend to increase when there is an inversion in the yield curves.
According to the American Conference Board, the most recent estimates of the likelihood of a recession remain near 99 percent, indicating that a recession is likely to occur in the United States within the next 12 months. Although US GDP growth was higher than expected in late 2022 and early 2023, due to better-than-expected consumer spending, projections continue to decline GDP growth for three consecutive quarters, starting in the second quarter of 2023. The price of gold usually rises during a recession as interest rates fall and investors look for options to hedge against a downturn in the stock market.
A rise in interest rates is associated with a rise in the US dollar and a fall in the price of gold. When real interest rates (the stated or nominal rate minus inflation) rise, and investors move to higher-yielding opportunities like bonds and stocks. When real interest rates fall, gold prices go up, as gold is more attractive compared to other investments. Real interest rates have recently turned positive after being negative for the past two years.
Inflation rates have been declining since they peaked in June 2022. During times of high inflation, investors turn to gold as a safe investment because high inflation generally means negative real interest rates. Rising inflation gives the US Federal Reserve more latitude to raise interest rates at upcoming meetings.
Three of these indicators (debt ceiling, rising interest rates, and low inflation) tell us that the price of gold has peaked in the near term. To see gold rise from here, we will need an environment of low interest rates caused by a recession. The indications seem to be telling us that it will come later this year or early next year. According to the performance on the daily chart below, the bulls will have the opportunity to return to the vicinity of the psychological resistance of $2,000 an ounce, if the currency pair moves towards the $1985 and $1992 resistance levels, respectively.
On the other hand, and for the same time period, the XAU/USD gold price broke the $1930 support level, a threat to the bullish trend outlook for gold.
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