Gold Prices Plunge as China’s Central Bank Pauses Purchases

James Hyerczyk
Published: Jun 7, 2024, 10:53 GMT+00:00

The pause in Chinese gold purchases triggered a sell-off, but potential weak U.S. economic data and subsequent rate cuts could support XAU/USD prices.

Gold Prices Forecast

Gold Prices Plunge as China’s Central Bank Pauses Purchases

Gold prices tumbled on Friday ahead of the U.S. Non-Farm Payrolls report, driven by the unexpected news that China’s central bank paused its gold purchases in May. This development has sparked significant selling pressure, with investors liquidating their long-term bullish positions, despite the lack of other typical catalysts like profit-taking, position-squaring, or higher Treasury yields.

China Halts Gold Purchases

The People’s Bank of China (PBOC) ceased adding to its gold reserves in May after 18 consecutive months of purchases. This pause comes as spot gold prices hit a record high, leading to a 1.4% drop in prices to $2,342 per ounce. China maintained its gold reserves at 72.80 million troy ounces, with the value of these reserves increasing slightly to $170.96 billion from $167.96 billion in April. The PBOC’s pause is notable as it has been the largest official sector buyer of gold in 2023, with net purchases of 7.23 million ounces.

Market Reaction and Analyst Insights

The market reacted sharply to the news from China, causing a more than 1% drop in gold prices. The record high of $2,449.89 per ounce reached on May 20 was largely driven by robust central bank demand, particularly from China. Ole Hansen, head of commodity strategy at Saxo Bank, commented that while China is unlikely to halt gold purchases permanently, the pause indicates a reluctance to buy at record prices. Hansen also noted that despite the current consolidation, the long-term bullish outlook for gold remains unchanged.

Looking Ahead: U.S. Economic Data

Traders are now turning their attention to the U.S. Non-Farm Payrolls report, which could further influence gold prices. A weaker-than-expected jobs report could bolster the case for a dovish Federal Reserve, potentially reigniting demand for gold as investors seek a safe haven amid expectations of lower interest rates. Lower rates reduce the opportunity cost of holding non-yielding assets like gold, making it more attractive.

Market Forecast: Cautiously Bullish

In the short term, the outlook for gold remains cautiously bullish. While the pause in Chinese gold purchases has triggered a sell-off, the potential for weaker U.S. economic data and subsequent rate cuts could provide support for gold prices. Traders should watch for the U.S. Non-Farm Payrolls data and Federal Reserve policy signals, which will be critical in determining the next direction for gold.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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