Gold price trends (XAU/USD) is trading in the $2,470s as it consolidates after a rally in August. The recent drop in US bond yields, which generally affects Gold negatively, contributed to this rally. Additionally, the Yellow Metal benefits from safe-haven flows due to ongoing geopolitical concerns in the Middle East and the Russia-Ukraine conflict. However, analysts suggest that these haven flows may be limited by current overextended positioning.
Gold Boosted by PPI Undershoot
Gold price trends received a boost following the release of US Producer Price Index (PPI) data on Tuesday. The data indicated a general easing in inflation and heightened expectations of a US interest rate cut. Specifically, Core PPI fell short of expectations.
Moreover, the Reserve Bank of New Zealand (RBNZ) unexpectedly cut its policy rate by 0.25% early Wednesday. This move may signal a global trend toward lower interest rates, which benefits Gold by enhancing its appeal relative to interest-bearing assets.
Limited Upside Potential for Gold
Despite the intensifying geopolitical risks, Gold’s upside potential might be constrained, according to TD Securities. This viewpoint aligns with IG Index and Redward Associates, who noted extreme positioning in the Gold Futures market in their recent report.
Daniel Ghali, Senior Commodity Strategist at TD Securities, comments, “Gold as a safe-haven is not necessarily a compelling proposition.” Geopolitical risks, such as a potential attack by Iran, are supporting Gold. However, this effect is moderated because investors are already heavily invested. This was evident when Gold’s response to the US Nonfarm Payrolls jobs data miss in early August was relatively muted.
Ghali further explains, “Systematic trend followers are ‘max long’, and the bar for outflows is progressively lower. Asian speculators, holding near-record positions in precious metals, are also exposed as the currency-depreciation hedge unwinds.”
Earlier in the year, Asian central banks accumulated Gold when the US Dollar (USD) strengthened due to persistent inflationary pressures in the US. This led to a significant depreciation of Asian currencies against the USD, prompting central banks to buy Gold as a hedge.
“This is in stark contrast to early-year conditions, which featured historic underpositioning leading to strong price performance. As safe-haven flows wane, speculative positions may be at risk of a correction,” Ghali adds.
Currently, only China’s retail demand for Gold remains strong. Flows into Chinese Gold ETFs are robust, but demand for ETFs outside China has begun to decline.
Gold Technical Analysis: Consolidation Below Range Ceiling
Gold continues to consolidate below the upper boundary of a trading range it has been within since July. The short-term trend appears to be sideways, likely extending in that direction.
XAU/USD 4-hour Chart
A decisive break below $2,455 on a closing basis would confirm the beginning of a new downward phase within the range. If this occurs, the price could move toward $2,400 or possibly the range floor in the $2,390s. The narrowing range might indicate a developing triangle pattern.
Conversely, a significant break above the range ceiling would suggest the emergence of a more bullish trend. This breakout would likely push the price up to at least $2,550, determined by extending the 0.618 Fibonacci ratio of the range’s height.
A decisive breakout would be marked by a long green candle that clearly surpasses the level and closes near its high, or by three consecutive green candles breaching the level.
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