Gold shines as dollar & Treasury yields ease
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THE recent weakness in manufacturing and jobs data has reignited investors’ concerns about the health of the US economy. The US Institute for Supply Management’s Purchasing Managers Index (PMI), a measure of the prevailing direction of manufacturing trends, came in at 46.3, lower than the 47.5 consensus, signalling a fifth straight month of contraction.
The weakness was further supported by the factory orders data from the US Census Bureau, which tracks the changes in the total value of new purchase orders placed with manufacturers. The data showed a decline of 0.7 per cent month-on-month, a more significant contraction than the expected -0.5 per cent figure. On the labour front, JOLTs Job Openings – a survey conducted by the US Bureau of Labor Statistics to help measure job vacancies - also fell short, coming in at 9.93 million, well below the 10.4 million consensus. This marks the first time since July 2021 that the monthly figure has dipped below the 10 million mark.
This led to a pullback in the US Dollar Index which briefly touched the 101.5 level, helping gold, which is US dollar-denominated, to rise. Moreover, the policy-sensitive two-year US Treasury yield retraced below 3.8 per cent, which has helped gold climb to a 13-month high above the psychological US$2,000 per ounce level. This is due to the positive correlation between gold and Treasuries, both of which are considered safe-haven assets.
On the technical charts, bullish signals are present for gold in both the short and long term. The price is trading above the golden cross level, where the faster 50-day Simple Moving Average (SMA) is above the slower 200-day SMA. Recent price action suggests XAU/USD has broken out of a bullish flag-type consolidation in the larger ascending broadening wedge pattern, after holding above the US$1,950 level – a previous swing high resistance formed in late January this year that has since become a recent support.
The breakout was supported by rising momentum, as the Moving Average Convergence Divergence technical indicator made higher highs on both daily and weekly timeframes. Near-term resistance could emerge at the US$2,030-2,070/ounce area, which is the bullish flag’s upside target level, confluent with significant swing highs formed in August 2020 and March 2022, by taking the height of the triangle and projecting it onto the breakout level at US$1,990.
Despite recent bullish developments, possible headwinds could persist for bullion. The surprise output cut by major oil producers could put a floor for oil prices, preventing inflation and yields from falling significantly. This could reduce the appeal of the non-yielding asset if its price continues to climb and traders begin to take profits on recent gains.
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The writer is research analyst at Phillip Securities
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