With geopolitical tensions, central-bank policies and higher bond yields once again dominating markets, gold (XAU/USD) ended the final week of July around $4,050 an ounce. As the conflict in the Middle East heated up last week, gold initially rallied, only for gains to be whittled away following a surge in Brent crude prices to above $100 a barrel and consequently higher bond yields and the US dollar.
Despite the retreat, gold was well clear of the $4,000 psychological level, supported in part by persistent central-bank buying and safe-haven appeal. Next week’s Federal Reserve meeting and US jobs report, alongside any further developments in the Middle East, will likely play a pivotal role as the precious metal looks for its next move. Will XAU/USD resume the rally that started earlier in the year or will it continue to consolidate?
This Week: Safe-Haven Buying Meets Higher Treasury Yields
Gold faced another volatile week with investors trying to weigh geopolitical risks against tighter financial conditions. Earlier in the week, bullion found support after a new bout of commercial ship attacks in the Red Sea and growing US-Iran tensions spurred demand for safe-haven assets.
But this changed later in the week as Brent climbed back above $100 a barrel, re-igniting inflation fears and the potential of the Federal Reserve keeping rates higher for longer. That led to the US 10-year Treasury yield topping out above 4.6% and a higher Dollar Index (DXY), which in turn capped any further gains in assets that don’t pay a return like gold.
ECB Keeps Rates on Hold but Leaves September Open
As expected by markets, the European Central Bank held all three benchmark rates constant:
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Deposit Facility Rate: 2.25%
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Main Refinancing Rate: 2.40%
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Marginal Lending Facility: 2.65%
ECB president Christine Lagarde pointed out that rising energy prices, related to growing tensions in the Middle East, has raised inflation risk while also reaffirming that decisions are data dependent going forward. The rate decision didn’t have much effect, but it confirmed the ECB and major central banks remain wary of calling the end of the inflation battle.
Central Banks Continue Building Gold Reserves
Long-term fundamentals continue to underpin the metal. The World Gold Council reports that central banks net bought 41 tonnes of gold in May, driven by purchases in:
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Poland: 18 tonnes
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China: 10 tonnes
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Singapore: 4 tonnes
In its latest survey, the WGC said:
Such official-sector demand continues to prop up gold from the bottom regardless of near-term moves.
Next Week: All Eyes Turn to the Federal Reserve
The centrepiece next week will be the July 29-30 Federal Reserve meeting.
Market sentiment points firmly toward the Fed standing pat. Investors will focus on:
Oil is above US$100 now. Any talk from the Fed that inflation concerns are gaining traction could send treasury yields higher and put gold under more pressure. A less hawkish outlook could do the opposite: weaken the dollar and offer a lift to gold.
US Labour Market Data Could Shape September Expectations
Outside the Fed, markets will take a close look at:
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US Non-Farm Payrolls
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US unemployment rate
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Average hourly earnings
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US ISM Manufacturing PMI
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US JOLTS job openings
This data will help inform the case for high-for-longer interest rates.
Middle East Developments Remain Critical
Geopolitics will remain a big focus as well.
The situation being watched includes:
Further escalation will likely boost safe-haven demand, especially if there are direct attacks on energy assets or shipping corridors.
Gold (XAU/USD) Technical Outlook: Bulls Need to Reclaim $4,078
Gold opened the week in the $4,053 region and is consolidating inside a large symmetrical triangle that started developing at the end of June. The first resistance level comes at the 200-period EMA, now around $4,078, whereas the 50-period EMA is flattened around the current price, indicating a lack of conviction.
The RSI has recovered to the 44 area, indicating that downside pressure is receding, but it has not confirmed the development of a bullish move. Support sits at the $4,022 level, then it moves on to the $3,964 and $3,914 areas.
If gold can maintain a move above the $4,078 region, then it will open the gates up to $4,133, followed by $4,173. A move out of the triangle can lead to another attempt at a fresh high.
Week Ahead Outlook
Long-term fundamentals still seem constructive for gold as we enter the last week of July. The gold bullion continues to be accumulated by central banks. The geopolitical risks are high and the asset remains an important part of portfolio diversification.
The only issue at this point is the monetary policy situation. The Treasury yield is higher, and the US Dollar has strengthened against other currencies. As a result, safe-haven buying has failed to push the yellow metal to new highs, and it is caught between the geopolitical support from one hand and financial tightening from the other.
The coming week will likely be significant. Higher Fed rhetoric concerning inflation concerns will probably prevent the bullion from pushing through the key resistance levels. A dovish narrative, however, or perhaps an improvement in the economic numbers or the geopolitical situation, will likely trigger the XAU/USD to regain $4,078 support and continue on the way higher.
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