Gold Rallies Off Key Support as Powells Jackson Hole Speech Looms
Gold (XAU/USD) has rebounded strongly after finding critical support near the $2,470 level, positioning itself above $2,490 on Friday. This recovery comes as traders and investors anticipate a significant speech by Federal Reserve Chairman Jerome Powell at the Jackson Hole Symposium, which could heavily influence the future of U.S. monetary policy and, by extension, the direction of gold prices. The precious metal’s resurgence is underpinned by a weaker U.S. Dollar (USD) and declining U.S. Treasury yields, both of which typically bolster gold as a non-interest-bearing asset.
Market Dynamics: Gold Supported by a Weaker Dollar and Mixed Economic Data
Gold’s recent rally can be largely attributed to its inverse relationship with the U.S. Dollar. As the USD weakens, gold typically strengthens, as the precious metal becomes more attractive to holders of other currencies. The current downturn in the dollar is partly due to declining long-term U.S. Treasury yields, which signal market expectations of future interest rate cuts by the Federal Reserve. While short-term yields, such as the 3-month U.S. Treasury note, have seen a slight uptick, the broader yield curve’s downward trend indicates that the market is pricing in lower rates ahead, a scenario that historically benefits gold.
The backdrop for gold’s movements also includes a mixed bag of U.S. economic data. On Thursday, gold experienced a drop of over 1.0%, partially due to reduced expectations of a large rate cut by the Fed in September. According to the CME FedWatch tool, the probability of a 0.50% rate cut has decreased from the mid-30% range to the mid-20% range. This recalibration is influenced by a combination of mixed Purchasing Manager Index (PMI) data and jobless claims figures, as well as cautious comments from some Fed officials.
The preliminary S&P Global Composite PMI for August fell slightly to 54.1 from 54.3 in July, which was better than the expected decline to 53.5. Within this, the Manufacturing PMI dropped significantly to 48.0 from 49.6, falling into contraction territory, while the Services PMI rose to 55.2 from 55.0, defying forecasts of a decline to 54.0. Meanwhile, jobless claims data painted a mixed picture. Initial jobless claims increased to 232,000, slightly above expectations, but continuing claims were marginally lower than anticipated, although still higher than previous levels.
XAU/USD Daily Price Chart
Source: TradingView, prepared by Richard Miles
Powell’s Speech: A Crucial Moment for Gold’s Outlook
The primary focus of market participants now is Powell’s upcoming speech at the Jackson Hole Symposium, a key event that could provide significant clues about the Fed’s future monetary policy. Powell is widely expected to confirm the market’s expectations of a rate cut at the September 18 meeting. Should he signal a more aggressive easing stance, it could provide a further boost to gold prices, as lower interest rates generally reduce the opportunity cost of holding non-yielding assets like gold.
Conversely, if Powell strikes a more hawkish tone or downplays the likelihood of significant rate cuts, gold could face renewed selling pressure. The precious metal’s recent volatility underscores the delicate balance in the market’s expectations, with any shift in sentiment potentially leading to sharp moves in gold prices.
Technical Analysis: Gold’s Uptrend Intact, but Reversal Risks Emerge
From a technical perspective, gold’s recent pullback to $2,470 represents a key test of support at the top of its previous trading range. The metal’s subsequent bounce suggests that this level is holding as strong support, allowing gold to continue its upward trajectory. Despite the recent pullback, the short-term trend remains bullish, with gold’s ability to stay above this support level reinforcing the “trend is your friend” mantra that favors long positions over short ones.
Gold’s breakout from its previous range on August 14 generated an upside target near $2,550, calculated using the 0.618 Fibonacci ratio of the range’s height. This target represents the minimum expectation for a follow-through move based on standard principles of technical analysis. As long as gold remains above the $2,470 support level, this target remains in play, with the overall outlook for the metal continuing to be positive.
However, the risks of a near-term reversal have increased, particularly if gold fails to maintain its position above key support levels. A break back inside the previous range, confirmed by a close below $2,470 (the low of August 22), would negate the upside target and cast doubt on the short-term uptrend. Such a move could signal a shift in market sentiment, potentially leading to further downside for gold.
Nevertheless, the broader outlook for gold remains bullish on medium and long-term timeframes. The metal continues to trade in a broad uptrend, supported by ongoing economic uncertainty, geopolitical risks, and expectations of a more dovish Fed policy. As such, any near-term weakness in gold may be viewed as a buying opportunity by long-term investors who remain confident in the metal’s ability to serve as a hedge against economic instability and inflation.
Awaiting Powell’s Verdict
As the market awaits Powell’s speech at the Jackson Hole Symposium, gold is positioned at a critical juncture. The speech has the potential to either reinforce the metal’s recent gains or trigger a fresh round of volatility. Investors should remain cautious, keeping an eye on both the technical levels and the broader economic indicators that could influence the Fed’s next move. Whether gold continues its ascent towards $2,550 or faces a pullback will likely hinge on the signals coming from Jackson Hole, making this a pivotal moment for the precious metal.
