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The price of gold declines, impacted by bond market concerns over Trump's return

Today's market analysis on behalf of Rania Gule Market Analyst at XS.com

 

July 8, 2024 (Investorideas.com Newswire) The gold price is trading around $2372 during today's Monday session, after falling from its peak of $2393 last Friday following generally weaker US labour market data in the non-farm payroll report, which increased expectations that the Federal Reserve might start cutting interest rates earlier than previously expected. This is positive for gold prices, but the price began to decline, in my opinion, due to Trump's "stance" which significantly impacts the bond markets.

Gold has fallen today in line with most commodities, which are declining due to concerns about the future of global growth following last week's weaker-than-expected US employment data. Due to increased chances of former President Donald Trump winning the upcoming presidential elections in November, rising US Treasury yields may also weaken the gold price. The market expects Trump to cut taxes but maintain spending, leading to higher inflation and interest rates, negatively affecting non-yielding assets like gold.

Additionally, I believe the short-term price is currently undergoing a profit-taking phase after the 1.45% rise we saw on Friday. Given the questions surrounding President Joe Biden's ability to take office and the lack of a popular alternative, Trump is increasingly seen as the most likely candidate to win the presidential election. His financial policies, known for tax cuts and borrowing to cover the deficit, are expected to keep inflation high, leading to higher interest rates. This hurts US Treasury bonds and pushes yields up, which inversely correlates with the price of gold. The US dollar also benefits from these expectations, increasing pressure on prices, especially for commodities primarily priced in dollars.

However, in my opinion, gold might continue to gain some support from other geopolitical and macroeconomic factors. Ongoing conflicts in the Middle East and Ukraine continue to drive anxious investors to store their wealth in gold. The efforts of the BRICS intergovernmental organization to reduce the dominance of the dollar also support the long-term outlook for gold, which is seen as the most realistic alternative to the dollar. The BRICS group is seeking an alternative to the US dollar due to the way the US government has used the currency as a weapon against unfriendly countries. If the dollar were not so widespread, US-led international sanctions would be less impactful.

I also believe that high demand from central banks, which accounts for nearly a quarter of the gold market volume, is an additional factor supporting the likelihood of rising gold prices. This is especially true after the unexpected strengthening of the US dollar in the first quarter of 2024, which prompted Asian central banks to start accumulating and storing gold bars as a hedge against the devaluation of their local currencies against the US dollar.

Returning to economic data, the weak labour market has increased expectations of soon lowering interest rates, boosting risk appetite. But this effect will not be sustainable, because all the negativity in the macroeconomy does not lead to deflation. On the contrary, we saw confirmation of wage growth at 4.1% year-on-year, and inflation reading came in at 3.3% year-on-year. At the same time, the unemployment rate reached its highest level in 31 months.

From my point of view, this means that the economic situation is deteriorating faster than inflation is slowing down. In this case, lowering the main interest rates would be an attempt to support economic growth rather than removing excessive monetary policy tightening. This also means that the chances of lowering interest rates for "bad" reasons rather than good reasons for the markets are increasing, negatively affecting risk appetite in the medium term.

So far, gold has reached a resistance level of $2390, which also caused the current reversal. Further improvement in risk appetite in global financial markets cannot be ruled out. The ability of gold to gain strength above $2390 could serve as an important price signal, heralding a new test of its historical highs near $2450.

However, we can see a greater chance of further downward pressure on the gold price. We see that breaking the 50-day moving average support at $2340 is the first bearish signal. The price could then quickly fall to the $2300 region, a key support area to determine the gold price movement over the coming months. A decline below this level would break the upward trend since October, which began when the Federal Reserve first indicated its readiness to cut interest rates.

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