On July 31st, Gold fell 0.5% trading at $4,076.53, reaching a 144 year high after The Bank of Japan held its interest rates at 1% during an 8-1 vote. The Yen fell against the Dollar after the bank decided to keep its rate unchanged. July is on track to record 1.8% growth for gold, the first monthly gain in 5 months, supported by central bank purchases, buying near $4,000, and increasing risk from late July’s world events. Since gold imports increased, there were many more transactions made at this level.
One of the two major currencies remaining unchanged led to the other one strengthening. The recent decision by the Bank of Japan to leave interest rates at 1% is giving Gold a hard time because the Dollar is increasing in strength. Gold is even harder to accumulate internationally because of this increase.
The gradual tightening of policy by the BoJ is lessening the decline of Gold. Investors are still focused on the geopolitical risk and slower inflation in the US along with the increased demand from the official sector.
BoJ Holds at 1% as Yen Weakness Supports the Dollar
The Bank of Japan decided to maintain its short-term policy rate at 1%, following its June hike, which brought the rate to a multi-decade high. The vote was 8:1, with the lone dissenter, board member Hajime Takata, preferring the rate to be set at 1.25%, after a 25-basis-point hike. The BoJ also indicated to Reuters that tightening policy further could be an option if the risks from inflation continue to grow.
The initial on-market response of the currency was slightly negative for gold. The BoJ decision prompted a negative response for the yen, which lost value to the dollar by about 0.81%, reversing the yen’s intervention-induced surge of the previous session. Gold is negatively correlated to the stronger dollar because of the inverse relationship, where gold is priced in U.S. currency. According to Reuters, the yen’s weakness can be attributed to the BoJ hold and the persistent uncertainty in rates.
The BoJ’s position is only marginally negative for gold. Its warning that inflation may remain above the 2% target, combined with currency intervention and future rate hike risks could create turbulence in global bonds and FX markets. The unorderly unwinding of yen-funded carry trades could further increase the demand for liquid safe haven assets in the gold market.
Gold Heads for First Monthly Gain in Five Months
Spot gold traded around $4,076.53, a decline of about 0.5% for the day. According to Reuters, gold was up about 1.8% in July and about 0.7% for the week, notwithstanding the decrease. (Reuters)
The latest quote should replace the draft’s wider target of $4,070 to $4,100. Further corrections are needed; gold’s officially recorded peak was approximately $5,318.40 on January 29, and not above $5,500. July 30 Comex gold was $4,100.10, and was around 22.9% from that record high. The futures settlement, and a record high comparison, were reported by The Wall Street Journal.
Risk from the Middle East continues to limit selling. According to Reuters, a drone attack on Egypt’s Damietta port, and additional concerns on a deterioration in available shipping in the Suez Canal, are part of the wider U.S.-Iran conflict that have investors guessing.
Central Banks Bought 289 Tonnes of Gold in Q2
In the World Gold Council’s Q2 Gold Demand Trends report, total demand was flat YoY at 1,269 tonnes (including over-the-counter trading). Demand in the first half of 2022 was up 2% to 2,522 tonnes, valued at a historic high of $380 billion.
During Q2, 289 tonnes were purchased by central banks, gold-backed ETFs had net outflows of 45 tonnes, and demand for gold bars and coins was unchanged at 307 tonnes. These results show that official-sector accumulation of gold continues, even with a decrease in gold investment in the Western world.
Gold Technical Analysis: $4,120 Breakout Remains the Bullish Trigger
Gold is trading in consolidation patterns around $4,077, after a recent bounce back and support held at $4,020. Gold price continues to trade up the 50-period EMA, currently at $4,063, however the 100-period EMA at $4,129 and the upper boundary of a symmetrical triangle continues to constrain price to the upside.
RSI is at 54, which represents a modest bullish price action with no overbought situation. A price level above $4,120, would draw attention to $4,172, $4,220 and would confirm a bullish breakout from the triangle. A sell-off in gold price to $4,020, would invalidate the bullish outlook and place $3,964 and $3,914 in focus.
Resistance: $4,120, $4,172, $4,220
Support: $4,020, $3,964, $3,914
Trade Setup
Entry: Buy after a confirmed break above $4,120
Targets: $4,172, then $4,220
Stop loss: Below $4,063
Frequently Asked Questions
Why is Gold Declining after Bank of Japan Decision?
Gold is declining because the BoJ’s holding of rates at 1% has weakened the Yen and supported the U.S. Dollar. An appreciating dollar has increased the cost of gold for buyers outside the US.
Is the BoJ decision bearish for gold?
It is somewhat bearish for the short-term using the currency channel, but additional tightening by the BoJ or instability with the yen could create more volatility in the markets, which could result in higher demand for safe-haven assets.
What price would confirm a bullish gold breakout?
A sustained price above $4,120 would indicate a bullish breakout for gold, with price targets at $4,172 and $4,220.
Arslan Ali Butt
Lead Markets Analyst – Multi-Asset (FX, Commodities, Crypto)
Arslan Ali Butt serves as the Lead Commodities and Indices Analyst, bringing a wealth of expertise to the field. With an MBA in Behavioral Finance and active progress towards a Ph.D., Arslan possesses a deep understanding of market dynamics.
His professional journey includes a significant role as a senior analyst at a leading brokerage firm, complementing his extensive experience as a market analyst and day trader. Adept in educating others, Arslan has a commendable track record as an instructor and public speaker.
His incisive analyses, particularly within the realms of cryptocurrency and forex markets, are showcased across esteemed financial publications such as ForexCrunch, InsideBitcoins, and EconomyWatch, solidifying his reputation in the financial community.
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