Gold declines as Trump effect weighs on bond markets

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  • Gold weakens as fears Trump could win the next presidency weigh on bond markets. 
  • A fear of increased inflation under a Trump presidency with the consequent higher interest rates is negatively impacting Gold. 
  • Gold is a non-interest-bearing asset that tends to suffer when interest rates remain high.  

Gold (XAU/USD) falls on Monday in line with most commodities, which are declining due to global growth fears after under-par US employment data last week. 

Rising US Treasury bond yields, as a result of increased probabilities that former President Donald Trump could win the next presidential election in November, may also be weakening Gold. Trump is expected to cut taxes but maintain spending which will lead to higher inflation and interest rates – a negative for the non-interest-bearing asset Gold.

Additionally, short-term traders taking profit after the 1.45% gain witnessed on Friday, could also be weighing. 

Gold weakens as bond markets suffer from Trump effect

Gold trades in the $2,370s on Monday, after pulling back from Friday’s peak of $2,393 reached following the release of US NonFarm Payrolls (NFP) data. 

Although the overall weaker US labor market data in the NFP report increased bets the Federal Reserve (Fed) will begin cutting interest rates earlier than previously expected, which is positive for Gold, price has started to come down due to a “Trump-put” on the bond markets. 

Given the question marks over President Joe Biden’s capacity to hold office and with no popular replacement on the radar, Trump is increasingly being viewed as the most likely candidate to win the presidential election. Known for cutting taxes and borrowing to cover the short-fall, his fiscal policies are likely to keep inflation high, leading to higher interest rates. This is having a negative impact on US Treasury bonds and pushing up yields, which are inversely correlated to Gold. The US Dollar is also benefiting from the outlook and further weighing on Gold price, which is primarily bought and sold in USD, according to Reuters. 

Gold supported by geopolitical backdrop

Gold continues to gain some support, however, from other geopolitical and macro factors.  

The ongoing conflicts in the Middle East and Ukraine are still factors driving nervous investors to store their wealth in Gold. 

The BRICS intergovernmental organization’s attempts to de-dollarize global trade continue to support the longer-term outlook for Gold, which is viewed as the most realistic replacement for the Dollar. BRICS are trying to find an alternative to the US Dollar because of the way the US government has weaponized the currency against enemy states. If the Dollar were not as ubiquitous, international sanctions led by the US would have less impact. 

High central bank demand, which accounts for roughly a quarter of the Gold market, is an additional factor underpinning Gold. After the unexpected strengthening of the Greenback in the first quarter of 2024, Asian central banks started to accumulate Gold to use as a hedge against the depreciation of their own domestic currencies versus the US Dollar.  

Technical Analysis: Gold could target all-time-highs

Gold has climbed to a major resistance level at the June 7 high at $2,388 and rolled over. If it can break above Friday’s peak of $2,393 it will continue the sequence of higher highs and probably unlock the next target at the $2,451 all-time high. 

XAU/USD Daily Chart

The bearish Head & Shoulders topping pattern that formed from April to June has been invalidated by the recent recovery, however, there is still a chance – albeit much-reduced – that a more complex topping pattern may have formed instead. 

If a complex pattern has formed in place of the orthodox H&S, and price breaks below the pattern’s neckline at $2,279, a reversal lower may still be possible with a conservative target at $2,171, the 0.618 ratio of the height of the pattern extrapolated lower. 

The trend is now sideways in both the short and medium term. In the long term, Gold remains in an uptrend. 

Economic Indicator

Nonfarm Payrolls

The Nonfarm Payrolls release presents the number of new jobs created in the US during the previous month in all non-agricultural businesses; it is released by the US Bureau of Labor Statistics (BLS). The monthly changes in payrolls can be extremely volatile. The number is also subject to strong reviews, which can also trigger volatility in the Forex board. Generally speaking, a high reading is seen as bullish for the US Dollar (USD), while a low reading is seen as bearish, although previous months’ reviews ​and the Unemployment Rate are as relevant as the headline figure. The market’s reaction, therefore, depends on how the market assesses all the data contained in the BLS report as a whole.

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