Gold (XAU/USD) traded around $2,500 on Wednesday, dipping lower as the US Dollar (USD) regained strength. The Greenback’s recovery, as reflected in the US Dollar Index (DXY), which climbed nearly 0.5% to just above 101.00, pressured gold prices. This rebound comes after the DXY touched a year-to-date low of 100.51 the previous day, underscoring the inverse relationship between the USD and gold, which is primarily priced in the US currency.
The recent movements in gold prices were influenced by a mixed batch of US economic data. On Tuesday, the Conference Board’s Consumer Confidence Index for August rose to 103.3, surpassing expectations of 100.7. This boost in consumer sentiment provided some optimism about the US economy, countering fears of a severe downturn. However, Deutsche Bank strategist Jim Reid noted that labor market indicators have weakened to their lowest point in the current economic cycle, raising concerns about a slowdown in job growth.
Gold Declines as Economic Concerns Ease
Gold’s decline on Wednesday reflects a moderation in concerns over the US economy’s health, spurred by mixed economic data. The Richmond Fed Manufacturing Index, for instance, fell further to -19 in August, down from -17 in July, disappointing forecasts of an improvement to -14. Meanwhile, US housing data presented a mixed picture: while house prices dropped 0.1% month-over-month in June, contrary to the expected 0.2% rise, the S&P/Case-Schiller House Price Index showed a 6.5% year-over-year increase, beating the 6.0% estimate.
These reports followed Monday’s stronger-than-expected US Durable Goods Orders, which surged 9.9% in July—the highest since May 2020—reassuring investors about the resilience of the US economy.
Despite the economic data, market expectations for US interest rates have remained relatively stable. The likelihood of a substantial 0.50% rate cut by the Federal Reserve (Fed) in September hovers around the mid-30% range, according to the CME FedWatch Tool, similar to the levels observed after Fed Chairman Jerome Powell hinted at potential rate cuts during his Jackson Hole speech. On Wednesday, while yields on 3-month US Treasury bills were rising, longer-term bond yields edged lower, suggesting some skepticism among bond traders about the likelihood of a significant rate cut. Such a cut would generally support gold, which tends to perform better in a low-interest-rate environment.
Key Data Ahead and Positioning Risks
Traders are now focusing on upcoming data, particularly the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) Price Index, due on Friday, which could offer clearer guidance on the Fed’s next moves. Additionally, Thursday’s release of the second estimate for US Q2 Gross Domestic Product (GDP) and commentary from Atlanta Fed President Raphael Bostic on Wednesday will also be closely watched. Nvidia’s earnings report, set for release after market close on Wednesday, could further influence market sentiment.
Despite the current economic backdrop, extreme long positions in gold pose challenges for bulls. According to Daniel Ghali, Senior Commodity Strategist at TD Securities, the level of macro fund positioning in gold has reached its highest point since the pandemic, echoing peaks seen in September 2019 and July 2016. Ghali cautioned that the risks of a downside correction are increasing, given the crowded trade in gold, likening the situation to a “crowded ship” where securing a spot on the “lifeboat” might be necessary.
