Gold price expectations amid declining yields ahead of the Jackson Hole meeting

Today’s market analysis on behalf of Rania Gule Market Analyst at XS.com

The gold price continues to trade within a descending channel but has found support ahead of the $1875 level. Gold has been rising this week as yields recede. However, with expectations of a prolonged period of higher federal interest rates, the short-term likelihood of an upward trend in gold seems limited.

The rise in risk-free interest rates, such as U.S. Treasury bonds, poses a significant challenge to interest-free assets like gold. Traders can obtain a rising ‘risk-free’ yield, making the case for keeping interest rates high over an extended period a downward pressure on gold. The current strong negative correlation between gold and yields has been evident in the recent decline in the 10-year bond yields, curbing the strength of the gold rally.

Yesterday’s weak reading of the U.S. S&P Global Purchasing Managers’ Index (PMI) indicated a drop in the Manufacturing PMI to 47 from the expected 49.3. As a market reaction, U.S. bond yields are often seen as the alternative cost of holding non-yielding metals. They dropped as investors seemed to anticipate the Federal Reserve’s potential easing of its tight policies.

While the markets remain confident that the Federal Reserve will temporarily halt rate hikes in September, the dollar index found resistance at the 104 level and settled near 103.60 after yesterday’s data release. Attention now turns to Jerome Powell’s speech tomorrow, where investors will seek further clues about future monetary policy measures by the Federal Reserve. The markets are also awaiting the U.S. weekly jobless claims data, which is scheduled to be released later today, Thursday.

The Gold price chart on the MT4 platform by XS.com

The above chart indicates that gold is on track to record a third day of gains, but technical indicators suggest a slowing of the upward movement. The recent uptick in gold price appears to have been challenging, as evident by the clear upper wicks on the candles, indicating price rejection before each close.

The next strong resistance for the potential upward trend lies around the $1937 level, but with decreasing volatility and an extremely strong negative correlation with the rising yield on the 10-year U.S. Treasury bonds, gold maintains its bearish primary expectations. These include a lower medium-term target at $1885 and a long-term target at $1875 if the downward trend persists.

In my view, risks to the current gold price expectations might emerge later this week if Jerome Powell hints at a more accommodative path regarding interest rates. However, he has thus far been cautious in confirming the tightening path due to the unpredictable nature of inflation.