On Wednesday, Gold (XAU/USD) continued to trade in the $2,460s as it maintained a consolidation phase following its rally in August. The rally was partly fueled by declining US bond yields, traditionally inversely correlated with Gold prices. Safe-haven demand for the precious metal was also reinforced by escalating geopolitical tensions emanating from the Middle East and the Russia-Ukraine conflict. Despite these factors, analysts caution that the influx of safe-haven flows could be hindered by excessively stretched market positions.
The recent release of US Consumer Price Index (CPI) data had a marginal impact on Gold prices. July’s CPI figures showed a 0.2% month-over-month increase, aligning with expectations and surpassing June’s 0.1% decline. Year-over-year CPI rose by 2.9%, meeting forecasts but slightly below the previous month’s 3.0% reading. Core CPI figures were also in line with predictions, with a 0.2% month-over-month increase and a 3.2% year-over-year rise.
Gold received a boost following the release of US Producer Price Index (PPI) data, which indicated a general moderation in inflationary pressures, heightening expectations of potential interest rate cuts in the US. Particularly, the underperformance of core PPI figures added to the momentum.
In a surprising move, the Reserve Bank of New Zealand (RBNZ) announced a 0.25% cut to its policy rate early Wednesday, hinting at a global trend towards lower interest rates. Lower interest rates generally favor Gold as they increase its attractiveness relative to interest-bearing assets.
Despite the prevailing geopolitical uncertainties, TD Securities suggests that Gold’s upside potential may be restricted due to its current overbought status. This sentiment aligns with observations from IG Index and Redward Associates, highlighting extreme positioning in the Gold Futures market. According to Daniel Ghali, Senior Commodity Strategist at TD Securities, the safe-haven appeal of Gold might not be as compelling at present, given the market’s saturation.
While geopolitical risks persist, including potential threats from Iran, the impact on Gold prices remains constrained due to investors’ extensive commitments. This was evident in Gold’s subdued response to the market volatility triggered by the US Nonfarm Payrolls report earlier in August.
Ghali notes that macro funds and systematic trend followers are heavily positioned in Gold, with Asian speculators also at risk as their precious metal holdings for currency depreciation hedging unwind. The strategist highlights the shift in Asian central banks’ Gold buying behavior earlier in the year amid USD strength, which contrasted with their historical underexposure.
Ghali emphasizes that only China’s retail demand for Gold currently shows resilience, with strong flows into Chinese Gold ETFs while interest in ETFs outside China wanes. As safe-haven flows diminish, speculative positions in Gold could face a repricing as lofty Federal Reserve expectations recalibrate.
