Gold (XAU) prices remain under pressure near $4,000 after the US ISM Manufacturing PMI jumped to 55.6 and strengthened expectations for tighter Fed policy. In my view, high Treasury yields may keep gold within the tight range in the short term while the $3,950 support remains critical. This article examines the latest and upcoming US data, Fed outlook and technical levels that may shape the next move in gold.
Gold Price Faces Pressure as US ISM Manufacturing PMI Surges
The manufacturing in the U.S. grew at the fastest rate in over four years in July. The ISM Manufacturing PMI jumped to 55.6 up from June’s 53.3. It also beat the market estimate of 54.
The ISM manufacturing production also rose to 58.5 and new orders rose to 56.7.
The employment index jumped to 52.8 as seen in the chart below. This data suggests that the factory demand, production and employment are still strong and this could be the reason for the Fed to continue to hold rates high.
The higher rate expectations support the US dollar and US Treasury yields, which could put pressure on the gold price.
The ISM report also carried an important inflation signal. The prices paid index dropped from 73 to 71.1, but still remains high. The trend of rising input costs has continued for the 22nd month among manufacturers. The rate of decline in the paid prices was slower from June to July as compared to May to June.
The Fed faces a tough situation because of strong production and high input prices. The economy continues to grow and create price pressures. That reinforces the bond market’s belief that the Fed might have to hike rates. The 2-year Treasury yield remains above the Fed’s target of 3.50% to 3.75% as seen in the chart below. This gap was first noticed in March and shows bond market expectations of tighter policy.
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See all Gold forecastsFed Rate Hike Risk and Rising Treasury Yields Weigh on Gold
The Fed kept its policy rate steady in July, but there were three votes to raise by 25 basis points. Chairman Kevin Warsh has also been scaling back forward guidance and allowing more dissent to be expressed within the committee. This will increase the weight of economic data on bond yields. It can also increase the term premium by increasing investors’ required return on the future policy when the policy is less certain.
The 10-year yield hit 4.743%, and the 30-year yield rose to 5.274%. Both yields eased slightly after oil prices fell, but they still remain strong. The high long term yields are a near-term negative for gold. But the increase in term premiums and the concerns of the long-term value of the dollar could boost gold’s function as a store of value.
US GDP Slowdown and High Inflation Send Mixed Signals for Gold
The nominal GDP has grown by approximately 6.5% in the year to June. But this includes inflation and is not called the real economic growth. The growth of real GDP decelerated to an annual rate of 1.5% for the second quarter of the year, compared with 2.1% in the first quarter. Meanwhile, the GDP price index increased 6.2%. This implies weak real growth and high price pressures.
However, long-term yields continue to lag behind the rate of nominal GDP growth and could signal rather loose financial conditions. Strong inflation can lead to a rise in yields, but the real growth can limit the rally. The positive inflation environment is good for the gold price but the positive momentum in the yields limits the short term rallies in gold.
Gold Price Outlook Hinges on US Jobs Data and ISM Services PMI
The ISM employment index sends more powerful signal than the latest payroll report. The unemployment rate for the US economy in June was 4.2%, but employment barely increased by 57,000.
Investors will now be focused on a report on job openings from the JOLTS on Tuesday, ADP employment on Wednesday and nonfarm payrolls on Friday. The market expects the payroll data for July to be higher over June.
The solid employment data would support the ISM signal and boost the chances of rate rise in September. This may lift the 2-year yield and the US dollar and exert pressure on gold. A weak employment report would test the ISM report and might decrease the expectations of another hike. That may lead to lower production and support gold.
The ISM Services PMI data will be released on Wednesday. The services hold a large share of the US economy. The investors will pay attention to the headline index, employment and prices paid. A robust performance in the service sector and higher prices would add to the argument for tighter Fed policy. But a slowdown in services and employment would suggest that the manufacturing recovery does not reflect the broader economy. Gold could be more sensitive to the services and payroll data since they offer wide range of demand and inflation.
The Treasury’s quarterly refunding announcement on Wednesday could add more volatility to markets. The Treasury raised its third-quarter borrowing forecast by $68 billion to $739 billion on Monday. The increase in long term debt issuance could raise term premiums and Treasury yields. This could create additional short term selling pressure on gold. But the growing government borrowing may also raise concerns about fiscal sustainability and currency debasement. These concerns may support gold over the long term.
Gold Technical Analysis: $3,950 Support and $4,200 Resistance in Focus
The gold price has been consolidating within the tight range below the 10- and 20-week SMAs on the weekly chart. However, the price has strong support at the $3,950 level, which is marked by the ascending broadening wedge pattern that stretches from the October 2023 lows. Despite this strong support, the RSI indicator is currently slightly above the 38 level, which indicates that the price still has some room to drop further to find the final bottom.
However, if a rebound from the support of the ascending broadening wedge pattern develops and the price closes above the $4,350 level, it will likely indicate that prices are ready to move higher towards the $5,000 area again. Overall, prices have shown no clear direction during the past few weeks, and a clear break below $3,950 or above $4,200 is required to indicate the next short-term direction in the gold market.
Final Thoughts
Gold may remain under short term pressure as strong manufacturing activity and high input costs support expectations for tighter Fed policy. The higher Treasury yields and a stronger US dollar could limit any recovery in gold. The upcoming employment and services data will provide the next direction. Strong data may increase the chance of a September rate hike and pressure gold further. But the weaker data may lower Treasury yields and support a rebound.
The long term outlook for gold is supported by inflation, rising government borrowing and concerns about the value of the US dollar. The $3,950 level remains the key support for gold. A break below this level could trigger a deeper correction. The recovery above $4,200 would improve the short term outlook, while a close above $4,350 could open the way towards $5,000. As long as the gold price breaks the key levels, it may consolidate in a tight range.
Read more: Softer Inflation Lifts Gold but High Yields Cap Gains