Gold Prices Forecast: Without China’s Support, How Overpriced is Gold?

Gold Faces Pressure

Gold ended last week sharply lower, wiping out earlier gains. The decline was driven by China halting bullion purchases in May and a stronger-than-expected U.S. labor market, suggesting U.S. interest rates may remain high longer than anticipated. These factors raise questions about gold’s value without China’s support. The weekly chart indicates gold’s near-term value could range between $2,217.22 and $2,130.29, implying potential losses of $75 to $150.

Last week, XAU/USD settled at $2294.015, down $33.185 or -1.43%.

China’s Impact on Gold Prices

For months, gold’s rally was attributed to aggressive central bank buying, particularly from China. However, the rally stalled in May, leading to speculation about whether central banks were still buying, had stopped, or were booking profits. Unlike high-profile investors who publicly discuss their trades, central banks operate quietly, leaving markets guessing about their next moves. This uncertainty has turned long-term bullish investors into short-term traders, increasing market volatility.

U.S. Labor Market Strength

Gold bulls are also contending with prolonged higher interest rates due to the robust U.S. labor market. The Labor Department’s report showed Nonfarm Payrolls (NFP) rose by 272,000 jobs in May, exceeding expectations of 185,000. The strong job market, with high wages and increased consumer spending, suggests inflation may not decline rapidly, compelling the Federal Reserve to maintain high interest rates. This situation increases the opportunity cost of holding non-yielding bullion, adding to the bearish sentiment in the gold market.

Market Reactions and Forecast

On Friday, gold’s decline accelerated after the strong U.S. jobs report diminished expectations for interest rate cuts this year. Gold prices dropped nearly 1% for the week, marking the third consecutive weekly fall. The robust economic data bolstered the dollar, making gold more expensive for overseas buyers. Traders adjusted their bets, now pricing in 37 basis points (bps) of rate cuts by December, down from 48 bps before the NFP data, with the first cut expected in November instead of September.

China’s Influence on Central Banks

China’s pause in gold purchases after 18 months has significant implications. Central banks often follow a Herd Theory; if China stops buying, others might follow. The potential for China to start selling could further pressure gold prices. Traders are closely monitoring charts for any signs of this shift before it becomes public knowledge.

Market Forecast: Bearish Outlook

Given the strong U.S. labor market and China’s halt in gold purchases, the outlook for gold remains bearish in the short term. The Fed’s likely decision to keep rates high to curb inflation and the reduced likelihood of near-term rate cuts suggest continued pressure on gold prices. Traders should prepare for potential further declines as the market adjusts to these developments.