04.08.202310:41 Forex Analysis & Reviews: Gold may pull back to $1,900

At the moment, gold is experiencing some difficulties, including high volatility that may cause a drop towards lower values. Experts believe that $1,900 could be the next downward target for gold under unfavorable conditions.

At the end of this week, the precious metal has dropped slightly. The reason is the unstable dynamic of the US dollar, which has lost some of its ground following the US credit rating downgrade by Fitch. The agency's decision to lower the long-term US rating to AA+ from AAA also impacted gold's performance. This action could be explained by the anticipated deterioration of the fiscal situation in the US over the next three years, as well as the country's rising public debt.

Moreover, the appreciation of US Treasury bonds contributes to the devaluation of the precious metal. This week, the yield of 10-year government bonds increased to 4.183% (from the previous close of 4.076%). Notably, an increase in US Treasury bond yields raises the cost of keeping gold, which does not bring any interest or coupon income. That is why there is always an inverse correlation between gold and treasuries: if bond yields rise, gold becomes cheaper, and vice versa. Experts consider US bonds an alternative investment to gold, so these assets usually have opposite trends.

The strengthening dollar also works against the precious metal. Gold loses ground. Against this backdrop, the decline in gold prices may accelerate. In the medium to long term, gold may fall to $1,900 per ounce.

According to specialists, the long-term technical picture seems to favor bulls. Some analysts are confident that gold can rise despite another interest rate hike as investors are trying to jump into the stock market following a months-long rally.

However, the macroeconomic environment remains uncertain for gold since the Federal Reserve raised rates by 25 basis points and left room for another hike in September. According to currency strategists at ANZ Bank, this could cap the rise in gold. The weakening demand for the precious metal as investors wait for the end of the tightening cycle adds fuel to the situation.

Analysts estimate that demand for gold from central banks, which was a growth driver for gold over several quarters in 2023, has dramatically decreased. In the third quarter of 2022, this figure was 458 tons, but for the same period this year, it was just 102.9 tons. The last decline in demand for the precious metal from central banks was recorded in the first quarter of 2022.

Experts believe that the sell-off of gold could intensify amid further US dollar appreciation. Lower demand from ETFs may also lead to a gold devaluation. Meanwhile, there has been a continuous outflow of investments from ETFs for five quarters in a row. Meanwhile, industrial demand for the precious metal is picking up.

According to reports from CME Group, on Thursday, August 3, the gold futures open interest indicator showed a decline after a slight increase the day before. Thus, the indicator dropped by 3.7 thousand contracts. Against this background, gold trading volume shrank by 30 thousand contracts, reversing downward after two days of growth.

At the end of this week, the precious metal has been demonstrating mixed trading. Such a trend amid the deterioration in open interest and trading volumes points to uncertainty in the gold future dynamic in the near term.

Experts see a positive factor for the metal in the ability of bulls to defend the $1,947 level for the third time during the month. A relatively positive dynamic in gold could inspire buyers, pushing the price towards an all-time high of $2,050 per ounce.

However, experts caution against excessive optimism as the short-term downward trend in gold, which has formed over the past two weeks, may allow the asset to slide to its nearest targets. According to analysts, the next support zone is around $1,900. The asset will touch this level if it falls to $1,947 per ounce. Experts suppose that a drop to $1,900 carries the risk of a downward reverse of gold's long-term trend.

The current situation favors sellers, as over 70% of traders remain in long positions on the precious metal. If market sentiment does not change, the XAU/USD pair will slump, entering the range of $1,900-$1,920. Nevertheless, analysts expect the continuation of positive sentiment in the medium term.

At the moment, the metal is trying to keep its position, though it is showing some signs of a decline. As this week ends today, gold is stable after falling during the four previous trading sessions. On Friday, August 4, gold traded near $1,967.35. By the moment, analysts' fears about the possibility of its further collapse have diminished but not disappeared. Moreover, the metal is striving to maintain a price balance.

The value of gold remains unstable. However, the precious metal is trying to rise after four consecutive sessions of a decline. However, the precious metal is moving towards new potential peaks very slowly. Thus, the result of such a movement is unpredictable and often does not inspire optimism. Analysts believe that the further dynamic of gold will be determined by the next batch of macroeconomic data from the US, as gold is inversely correlated with the dollar. Remember that when the greenback depreciates, gold becomes more expensive, and vice versa.

Traders are focused on the US job market data, which will be published later on Friday, August 4. Preliminary estimates showed that unemployment in the United States remained at 3.6% in July, while the number of jobs in the non-farm sector increased by 200 thousand. Notably, in the first month of summer, this indicator increased by 209 thousand. Experts believe that positive reports on the US labor market will support the US dollar, which will negatively affect gold prices.