Gold trades flat ahead of Powell testimony

  • Gold pulls back after the news the PBoC has stopped purchasing Gold for the second month in a row. 
  • The PBoC is one of the largest consumers of the precious metal and for 18 consecutive months until May accumulated Gold. 
  • Gold forms a two-bar reversal pattern on the daily chart, which could indicate a short-term pullback. 

Gold (XAU/USD) is trading flat in the $2,360s on Tuesday – stabilizing after the heavy sell-off on Monday. Gold’s weakness at the start of the week came after the news that the People’s Bank of China (PBoC), one of the largest consumers of Gold in the world, had not bought any Gold for the second month in a row in June, after 18 consecutive months of reserve-building, according to data from the PBoC. 

Gold declines on impact of Trump on bond markets

Gold has also declined as a result of the US Treasury bond market absorbing political risk from an increased chance that former President Donald Trump will win the US presidential election in November. 

If Trump wins the presidency, he is expected to cut taxes and borrow, leading to a worsening fiscal position for the US. Critics say his fiscal profligacy will lead to higher inflation, which in turn will keep interest rates high. Gold is falling because it is a non-interest-bearing asset that becomes less attractive to investors when interest rates are high.  

The possibility of a Trump presidency is pushing bond prices down and bond yields up, benefiting the US Dollar (USD) because of its high correlation with yields. This, in turn, weighs on the Gold price, which is primarily bought and sold in USD. 

After a recent televised debate in Atlanta, in which President Biden struggled to answer several of the questions, critics raised doubts about his cognitive capacity given his advanced years and possible dementia. The upshot is that Trump has increased his lead in opinion polls. Additionally, if Biden steps down, his number two, Kamala Harris, is seen as unlikely to have Biden’s broad appeal. 

Trump’s presidential challenge has further gained credibility after the US Supreme Court decided he had partial immunity from any responsibility for the uprising that followed his defeat at the 2020 election and led to his supporters storming Capitol Hill. Prior to the ruling, it was thought Trump’s various indictments might disrupt his campaign or prevent him from taking office. 

A key event for Gold that could move the price on Tuesday is Federal Reserve (Fed) Chairman Jerome Powell’s bi-annual testimony to the Senate Banking Committee. It is expetced he will maintain his cautious data-dependent approach, leaving investors still guessing as to the timing of the Fed’s next move.  

Technical Analysis: Gold forms a two-bar reversal

Gold has formed a two-bar reversal pattern (green shaded rectangle) after climbing to a major resistance level at the June 7 high at $2,388. This pattern forms after a long green-up day is followed by a long red-down day of a similar length and size. When this occurs at a market top, it can be a short-term reversal sign. 

XAU/USD Daily Chart

The outlook is unclear, but Gold could pull back now, perhaps falling to the 50-day Simple Moving Average (SMA) at $2,342. 

If Gold can break above Friday’s peak of $2,393, it will continue the sequence of higher highs and probably unlock the next target at the $2,451 all-time high. 

The bearish Head & Shoulders topping pattern that formed from April to June has been invalidated by the recent recovery. However, there is still a chance – albeit much reduced – that a more complex topping pattern may have formed instead. 

If a complex pattern has formed in place of the H&S, and the price breaks below the pattern’s neckline at $2,279, a reversal lower may still be possible with a conservative target at $2,171, the 0.618 ratio of the height of the pattern extrapolated lower. 

The trend is now sideways in both the short and medium term. In the long term, Gold remains in an uptrend. 

Economic Indicator

Fed’s Chair Powell testifies

Federal Reserve Chair Jerome Powell testifies before Congress, providing a broad overview of the economy and monetary policy. Powell’s prepared remarks are published ahead of the appearance on Capitol Hill.

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Next release: Tue Jul 09, 2024 14:00

Frequency: Irregular

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Source: Federal Reserve

 

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