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Gold trading reminder: Gold prices fell after hitting a record high. Can they continue to rise in the future?

2024-07-18

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In the early Asian session on Thursday (July 18), spot gold fluctuated in a narrow range and is currently trading around $2460.79/ounce. On Wednesday, gold prices rose and fell, and earlier hit a record high of around $2483.56/ounce. However, they gave up their gains in the late trading and closed at around $2458.51/ounce. From a fundamental perspective, there is no obvious negative news, and the decline in gold prices is likely due to profit-taking by bulls.

Relatively speaking, this week, Federal Reserve officials continued to make dovish speeches, and the latest US real estate data also performed poorly. The Federal Reserve Beige Book showed that companies expect future growth to slow, the labor market continued to weaken, the US dollar index fell to a nearly four-month low, and US Treasury yields continued to weaken. These have limited the short-term correction space for gold prices and are expected to provide opportunities for gold prices to rise further.

"We expect the Fed to get closer to cutting rates, and we've seen that, and that expectation is driving yields to continue to slowly fall, and coupled with a weaker dollar, that's the main support behind gold's move," said David Meger, director of alternative investments and trading at High Ridge Futures.

More Fed policymakers said they are increasingly confident that the pace of price increases is on a path back toward the Fed's goals after prices rose faster than expected earlier this year.

Fed Governor Waller said on Wednesday that the time for a rate cut is "approaching," but uncertainty about the economic trajectory makes the timing of the action unclear.

Data showed that U.S. factory production increased more than expected in June, contributing to a solid rebound in output in the second quarter.

According to the CME FedWatch Tool, the market now sees a 98% chance of a U.S. rate cut in September. Relatively speaking, market sentiment has retreated because the market expected a 100% chance of a September rate cut by the Fed the day before.

The dollar index fell about 0.5% to a near four-month low on Wednesday, closing at 103.73, the lowest closing price since March 22, making gold cheaper for investors holding other currencies. In the Asian market on Thursday, the US dollar index continued to fall, hitting a low of 103.64, a drop of about 0.09%.

This trading day focuses on changes in the number of initial jobless claims in the United States, pays attention to the European Central Bank's interest rate decision, the July Philadelphia Fed manufacturing index in the United States, and pays attention to news related to the geopolitical situation and the US election.

The US single-family housing starts rate hit an eight-month low, and the manufacturing industry showed signs of recovery

The US single-family housing starts rate fell to an eight-month low in June due to rising mortgage rates, indicating that the housing market is likely to drag down economic growth in the second quarter.

The report released by the US Department of Commerce on Wednesday also showed that single-family housing building permits fell to a one-year low in June, indicating that even if the Federal Reserve cuts interest rates as expected in September, the expected rebound in construction activity may be suppressed.

Despite this, the shortage of second-hand housing supply still provides support for new home construction. The shortage of supply has kept house prices high, and coupled with rising borrowing costs, the dream of buying a house, which has long been regarded as the American dream, has become out of reach for many people.

"The United States is not building enough single-family homes to alleviate the shortage of affordable housing, which will inevitably further inflate the housing bubble and make the cost of buying new homes even more unaffordable," said Christopher Rupkey, chief economist at FWDBONDS.

Single-family home starts, which account for a large proportion of residential construction, fell 2.2% in June from the previous month to a seasonally adjusted annual rate of 980,000 units, the lowest level since October last year, the U.S. Commerce Department's Bureau of Statistics said.

May data was revised up to a decline to 1.002 million units from the previous value of 982,000 units. Single-family home starts rose 5.4% in June from a year ago. Residential construction momentum was strong for most of last year and until the first quarter of 2024 due to a lack of existing housing supply.

However, the strong momentum has gradually weakened as the average rate on a 30-year fixed-rate mortgage rose back above 7% in April against the backdrop of high inflation and a strong economy.

While homebuilder confidence fell to a seven-month low in July, the National Association of Home Builders' (NAHB) gauge of expectations for single-family home sales over the next six months improved.

Economists estimate that residential investment, which includes homebuilding, was likely to weigh on gross domestic product in the second quarter. Residential investment contributed more than half a percentage point to GDP growth in the first quarter.

The Atlanta Fed expects GDP to grow at an annualized rate of 2.7% in the second quarter. Growth in the first quarter was 1.4%. The government is due to release second-quarter economic growth data next week.

"We expect rate cuts later this year, which will have a mixed impact on the residential construction industry overall, and we think the Fed will respond to rising unemployment, which will curb the influx of new homebuyers," said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Permits for the construction of single-family homes fell 2.3% to an annual rate of 934,000 units in June, the lowest level since May 2023. Starts for multifamily homes surged 22.0% to 360,000 units. Overall housing starts rose 3.0% to a rate of 1.353 million units.

Economists had forecast housing starts rebounding to a rate of 1.30 million units. Housing starts fell 4.4% from a year ago. Permits for multifamily buildings surged 19.2% to an annual rate of 460,000 units. That pushed overall permits up 3.4% to an annual rate of 1.446 million units.

The number of homes approved for construction but not yet started rose 1.8% to 277,000 units. The single-family homebuilding backlog rose 0.7% to 140,000 units.

Single-family home completions rose 1.8% to 1.037 million units. Overall housing completions rose 10.1% to 1.710 million units, the highest level since January 2007. Realtors estimate that housing starts and completions will need to remain in the 1.5-1.6 million annual rate range for a long time to close the inventory gap.

While housing market data was mixed, another interest-rate sensitive sector, manufacturing, may be showing signs of recovery.

Another report from the Federal Reserve on Wednesday showed industrial production rose 0.4% from the previous month in June after rising 1.0% in May, with auto production surging to a nine-year high.

Factory production rose 1.1% from a year earlier in June, and the annualized rate in the second quarter was 3.4%. Prior to this, manufacturing had declined for four consecutive quarters.

"Manufacturing is coming out of its previous lows," said Bernard Yaros, chief U.S. economist at Oxford Economics.

Fed Beige Book: U.S. businesses expect slower growth in the future, and the labor market continues to be weak

U.S. economic activity expanded at a slight to moderate pace from late May to early July, and businesses expect slower growth in the future, and they also reported signs of continued weakness in the job market, which is consistent with the Fed's shift in tone. The Fed has recently been more closely assessing the extent of the slowdown in labor demand to ensure that it does not wait too long before cutting interest rates.

The Fed's latest assessment of the health of the economy also showed a small increase in inflationary pressures, with most Fed districts reporting that input costs are beginning to stabilize.

"Economic activity in most districts maintained a slight to moderate pace of growth during the reporting cycle," the Fed said in a survey released Wednesday, which surveyed business contacts in 12 districts through July 8.

The survey noted that while seven of the Fed's districts reported some growth in economic activity, five districts reported flat or declining activity, three more than in the previous reporting period, and businesses forecast a bleak outlook.

"Expectations for economic performance over the next six months are for slower growth due to uncertainty surrounding the upcoming election, domestic policy, geopolitical conflict, and inflation," the Fed survey said.

The report showed that the upcoming U.S. presidential election in November, in particular, was gaining attention from business contacts. The Atlanta Fed said uncertainty about the election outcome appeared to be weighing on investment activity in the renewable energy sector, while the Dallas Fed said the outlook for manufacturing, construction and real estate was weighed down by factors including election uncertainty.

The Fed releases its analysis about every six weeks after Chairman Jerome Powell and his colleagues have stressed that risks to inflation and employment are currently balanced. Earlier Wednesday, two Fed policymakers said they were "getting closer" to a rate cut, comments that appeared to set the stage for lower borrowing costs in September.

Fed officials were hammered by higher-than-expected inflation in the first half of the year, but they were encouraged by more positive inflation data in April, May and June. The Fed's preferred measure showed inflation still at 2.6%. The next release date for that measure is July 26.

With inflation resuming its downward trend, Fed officials have more strongly cited a clear deterioration in the labor market as a reason for the Fed to begin cutting its policy rate.

Fed officials say "closer" to rate cuts as inflation trajectory improves, labor market more balanced

Fed policymakers said Wednesday that the Fed is "closer" to cutting rates given an improved inflation trajectory and a more balanced labor market.

Fed Governor Waller and New York Fed President John Williams both noted that monetary easing is getting closer, a point Waller emphasized in a speech at the Kansas City Fed and Williams echoed in an interview.

Separately, Richmond Fed President Barkin said he was "very encouraged" that the decline in inflation is beginning to broaden. "I'd like to see that continue," he told a business group in Maryland.

Federal Reserve policymakers, including Chairman Jerome Powell, have been flooding the board with comments this week pointing to their growing confidence that the slowing trend in inflation that began last year is continuing, despite a brief pickup earlier this year.

Fed policymakers said price pressures appear to be easing across the board, with lower goods prices, slower increases in housing costs, more modest wage growth and a long-awaited reprieve in price increases in the services sector.

Williams and Waller appeared to rule out a rate cut at the Fed's July 30-31 policy meeting, a view reflected in financial markets, which are pricing in less than a 5% chance of a rate cut at that meeting.

Waller listed September through December as a potential time frame ripe for rate cuts, omitting July.

"We're actually going to learn a lot between July and September," Williams said in an interview. "We're going to get two months of inflation data," he said.

Karim Basta, chief economist at III Capital Management, wrote that all three policymakers who spoke Wednesday "pointed to September" to begin easing policy.

Financial markets agreed, continuing to bet on Wednesday that the Fed will cut borrowing costs again in November and December, lowering its benchmark policy rate target range to 4.50%-4.75% by the end of 2024, from 5.25%-5.50% for the past year.

Waller, who said in May that he needed to see a few more months of improving inflation data to convince him that a rate cut was necessary, said last week's data showing the first month-on-month decline in the consumer price index in four years was "the second consecutive month of very good news."

He laid out three possible scenarios for inflation in the coming months. Waller said the two most likely scenarios show that inflation will continue to fall toward the Fed's 2% target in the coming months, although in one scenario, the decline is faster and more sustained than in the other. The third and least likely scenario is that inflation reaccelerates and interest rates will remain unchanged.

Still, Waller said, "given that I think the first two scenarios are most likely, I think the time to lower the policy rate is getting closer."

"I feel like the last three months -- and I would include June as well, based on what we've seen -- seem to have gotten us closer to the downward trend in inflation that we're looking for," said Williams, who is also vice chairman of the Federal Open Market Committee. "I would like to see more data to get more confidence that inflation is moving sustainably toward our 2% target. We have a few months of good data now."

U.S. Treasury yields fall to four-month lows as Fed officials cite progress on inflation

U.S. Treasury yields fell to their lowest in four months on Wednesday after senior Fed officials said progress in inflation moving back toward its 2% target set the stage for a possible first rate cut in September.

"Their comments today are like saying, don't expect a rate cut in July, take that out of the equation," said Matt Eagan of Loomis, Sayles and Company.

"The Fed is still sticking to its message that it wants to see more good data," said Vail Hartman, U.S. rates strategist at BMO Capital Markets. "It does essentially rule out July action, but September is still very likely."

Softer jobs data and slowing inflation in recent weeks have raised the odds of an imminent rate cut.

The 10-year Treasury yield fell 2 basis points on Wednesday to 4.146%, the lowest since March 13.

Positioning for a possible Trump victory in November's U.S. presidential election continued to wane on Wednesday. The odds of a Trump victory have risen after Saturday's assassination attempt. Odds from online betting site PredictIt imply a Trump victory chance of about 67%, up from about 60% on Friday, and a Biden win chance of about 28%.

Analysts say a Trump presidency could lead to more pro-business policies, as well as tax and tariff cuts, which could drive inflation higher. That pushed long-dated yields higher on Monday, causing the Treasury yield curve to steepen sharply.

"The steepening curve has been a very crowded trade," Eagan said, referring to traders buying shorter-dated bonds and selling longer-dated ones.

He said the steepening has reversed after Monday's move, which was likely profit-taking.

Longer-dated bond yields are expected to become higher relative to shorter-dated yields, with supply increasing as the U.S. budget deficit worsens regardless of whether Trump or Biden is president.

ECB expected to hold off on policy at July meeting, but door remains open for September rate cut

The European Central Bank is all but certain to keep interest rates unchanged on Thursday and will signal that its next move will still be a rate cut, although that guidance is expected to be vague and conditional.

The ECB cut interest rates from a record high last month in a move that was widely expected but viewed by some ECB policymakers as too hasty. With inflation and wage growth in the euro zone still stubbornly high, the ECB is expected to be more cautious about subsequent moves.

European Central Bank President Christine Lagarde said the move was a "really tough" move.de) will try to strike a balance at this meeting, arguing that price pressures are falling as expected, but risks remain, so more data is needed before policymakers pull the trigger on rate cuts again.

With Lagarde sending that message in the weeks leading up to the meeting, the focus has shifted to the September meeting, suggesting Thursday's policy meeting may be the least complicated since before the pandemic.

"We think the ECB is likely to send the message that they remain resolute in their view that inflation is falling and that they have overall the ability to ease further," said Peter Schaffrik, a strategist at RBC Capital Markets.

Markets expect the ECB to cut rates twice over the rest of the year and five times by the end of next year, a view that no policymaker has challenged in recent weeks.

"We think the ECB is not uncomfortable with the current market expectations of another 25 basis point cut in September," said Antonio Villarroya, an economist at Santander CIB, predicting that the ECB will cut rates quarterly to get the deposit rate down to 2.5% by September 2025.

The above information is provided by special analysts and is for reference only. CM Trade does not guarantee the accuracy, timeliness and completeness of the information content, so you should not place too much reliance on the information provided. CM Trade is not a company that provides financial advice, and only provides services of the nature of execution of orders. Readers are advised to seek relevant investment advice on their own. Please see our full disclaimer.

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Gold trading reminder: Gold prices fell after hitting a record high. Can they continue to rise in the future?

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