Gold is Climbing amid Weakening American Economy

Gold prices rose by 1.5% to $2,362 per troy ounce this week, after rolling back from $2,374 early on Thursday. Investors might be cautious looking ahead to further major events. Weak business activity and declining GDP in the United States have become major upside drivers for gold prices.

U.S. S&P Global Manufacturing PMI rose to 51.3 points from 50.0, while ISM reported a decline to 48.7 points from 49.2 points in the sector. According to Atlanta Federal Reserve (Fed) GDPNow, Q2 2024 GDP is expected to slow down to 1.8% QoQ from 2.7%. This convinced investors of the cooling of the U.S. economy.

Borrowing costs in the American debt market started to drop. 10-year Treasuries yields declined to 4.38% from 4.50%. Bets on an interest rate cut by the Fed in September soared above 50.0%. Still, this is a very fragile stance. Thus, gold prices immediately rose by 1.3% but scaled back on Tuesday. The idea of a weaker U.S. economy was again confirmed by ADP Nonfarm Payrolls, which dropped to 152,000 from 188,000. 10-year debt yields declined to 4.26%, while bets on an interest rate cut in September surged above 60.0%.

Shortly afterwards, May S&P Global Services PMI in the U.S. was released, rising to 54.8 points from 51.3, while ISM Non-Manufacturing Business Activity jumped to the highest reading since November 2022 at 61.2 points from 50.9. Market euphoria was replaced by cautious optimism. U.S. 10-year debt yields rose to 4.30% from 4.26%, and bets on interest rate cuts by the Fed in September dropped to 56.8%. Nevertheless, the S&P 500 broad market index updated its all-time highs, while gold prices resumed climbing.

Investors are awaiting the official release of U.S. May Nonfarm Payrolls on Friday and Fed Chair Jerome Powell's comments after the regular meeting of the regulator on June 12. Investors expect the U.S. labour market to cool, prompting the Fed to signal a future shift to a dovish stance. However, even large investors are uncertain about gold prices' future movements. The SPDR Gold Trust (GLD) has reported a neutral fund flow balance during this and the previous week. Apparently, investors have decided to pause and see where gold prices will head.

The Bank of Canada was the first to cut its interest rates among developed nations. The European Central Bank is expected to follow. The Fed has some time to wait and see, joining the monetary easing club in September. Thus, the Dollar could strengthen before then, putting additional pressure on gold prices and potentially forcing them to decline.

From a technical standpoint, gold prices are above the support at $2,290-2,310 per ounce and may easily rebound to the resistance at $2,400, or even rise to $2,450 per ounce. A dive below the support at $2,290-2,310 will signal the start of a deep correction.