Gold (XAU/USD) exhibits a narrow trading range in the $2,340s, marking nearly a one percent gain on Wednesday. This surge comes in light of a series of discouraging economic data releases from the US, fueling speculations of potential interest rate cuts by the Federal Reserve (Fed) before the year concludes. Concurrently, global inflation trends downward, prompting several central banks to consider interest rate reductions, thereby diminishing the opportunity cost of holding non-yielding assets like Gold, thereby rendering it more appealing to investors.
However, amidst these concerns, a surprising uptick in the US ISM Services PMI data, unveiled on Wednesday, offers a counterbalance. The data reveals a resilient sector, with the ISM Services PMI climbing to 53.8 in May from the prior 49.4, surpassing economists’ forecasts of a modest increase to 50.8. Notably, the surge is propelled by a rise in New Orders, while the Prices Paid component indicates a slight moderation in high Services inflation, slipping to 58.1 from 59.2.
In line with these developments, Gold sees upward movement on Wednesday, reflecting the growing indications of a cooling global economy and the potential for interest rate adjustments. Eurozone factory-gate prices register a 1.0% decline in April, as per Producer Price Index (PPI) data from Eurostat, falling below economists’ projections of a 0.5% decrease. Moreover, core costs, including non-durables, exhibit cooling trends, further corroborating global inflation undershoots.
This trend extends to various economies, with Australia’s first quarter GDP growth data failing to meet expectations, while the US JOLTS Job openings data also falls short. Additionally, the ADP Employment Change data for May disappoints, suggesting a recalibration in the US labor market.
The prospect of interest rate cuts looms large, with several central banks, including the ECB, BoC, and SNB, expected to act in June, bolstering Gold’s appeal.
Despite the solid fundamental backdrop, short-term sentiment towards Gold appears bearish, as noted by Ryan McKay, Senior Commodity Strategist at TD Securities. While acknowledging the robust Asian demand for currency hedging purposes, McKay observes a shift in short-term trend signals, though he anticipates this negativity to be contained given the ample margin before the next significant selling trigger.
In summary, Gold’s trajectory reflects a delicate balance between economic uncertainties, speculations of rate cuts, and the enduring appeal of the precious metal as a hedge against currency depreciation, underscoring its role as a haven asset in times of turbulence.
