Gold prices decline following higher than expected US data

Gold has reversed earlier gains following the release of higher-than-expected US PMI data, which showed strong activity levels in US Manufacturing and Services in June. This indicates that inflation and interest rates will remain higher for longer, causing gold to drop off a cliff to trade in the $2,330s on Friday, specifically trading around $2,333.25 per ounce at the time of writing; down -1.14%.

Higher PMIs indicate that inflation will likely remain elevated, resulting in the US Federal Reserve (Fed) having to delay the time when it will be able to cut interest rates, a key determinant of Gold price. Lower interest rates are positive for Gold as they reduce the opportunity cost of holding gold, which is non-coupon paying, compared to other assets like bonds.

Gold purchases by central bank constitute another factor influencing gold’s price, with 81% of respondents believing central banks would increase their holdings in 2024. A large share of this buying has been by Asian central banks hoarding gold as a hedge against a strengthening US dollar.

The trend of using gold as a buffer against the strength of the US dollar has been magnified by the increasingly partisan division of world trade between BRICS nations and the West. A major policy plank of the BRICS and their allies is to break the dominance of the US Dollar so that it cannot be used as a weapon against their members (including Russia and now Iran). One of the few realistic replacements to the Dollar would be conducting trade in Gold-denominated financial assets.

The split between the BRICS and the West has also been accelerated by Russia’s invasion of Ukraine and Israel’s war in Gaza, which has divided the world along ideological and political lines. As these conflicts are not set to end any time soon, they are likely to continue providing support for the demand for gold, both as a potential medium of exchange and a safe-haven.