On Monday, gold (XAU/USD) experienced a decline, trading in the $2,320s, as a positive risk-on sentiment inherited from the Asian session reduced safe-haven demand for the metal.
Gold Retreats After Temporary High
Gold witnessed a reversal after reaching a temporary high following the release of slightly lower-than-expected US core Personal Consumption Expenditures (PCE) data on Friday, which is the Federal Reserve’s preferred gauge of inflation. The core PCE data for April came in at 0.2% month-over-month, slightly below the forecast of 0.3%. Although this data initially lifted the precious metal to a peak of $2,359, it quickly retreated thereafter.
The lower inflation data has recalibrated expectations regarding the timing of potential interest rate cuts by the Fed, increasing the probability of a rate cut in September to 55%, up from around 50% previously. This shift is positive for gold, as it tends to appreciate when interest rates decline. However, gold investors remain cautious due to uncertainties surrounding the trajectory of interest rates amidst persistent inflation and a Federal Reserve that has not yet clearly articulated its intentions.
Support for Gold Expected During the Summer
According to Bart Malek, Head of Commodity Strategy at TD Securities, gold is likely to find support during the summer as investors assess the possibility of future interest rate adjustments by major central banks, coupled with buoyant Asian demand.
Although gold retreated from its all-time highs in April after the Fed indicated a delay in expected interest rate cuts, it has found stability as speculators have covered short positions following a string of disappointing US economic data, including the undershoot in Friday’s core PCE data. Malek suggests that gold is both capped and supported at its current levels.
Malek further emphasizes that the consistent decline in the Fed’s preferred inflation measure suggests that the gold market should receive ample support during the summer. However, he cautions against expecting a significant rally in the near term, as policymakers require more evidence that their economic models accurately reflect reality and that interest rates are indeed sufficiently restrictive to control inflation. Hence, gold movements and investor positioning will largely depend on upcoming data releases.
Moreover, gold is bolstered by Asian buying as a hedge against currency depreciation, with recent reports noting Chinese buying as a counterbalance against the devaluation of the Renminbi.
