Gold rolls over, failing to sustain PCE-related spike

• Gold spikes to a high of $2,359 on Friday after US PCE inflation data undershoots expectations, suggesting interest rates might fall. 
• Gold then rolls over and declines to three-week lows, however, as safe-haven demand declines, bulls take flight. 
• Asian demand and cooling inflation expectations could put a floor under the rout. 
• Technicals remain bearish after a breakout from a Bear Flag. 

Gold (XAU/USD) slides lower to trade in the $2,320s on Monday as a positive risk-on environment inherited from the Asian session lowers safe-haven demand for the metal. 

Gold rolls over after hitting temporary high

Gold pumped after the release of marginally lower-than-expected US core Personal Consumption Expenditures (PCE) data on Friday, the Federal Reserve’s (Fed) preferred gauge of inflation. Core PCE came out at 0.2% month-over-month in April instead of 0.3% forecast. The data lifted the precious metal temporarily to a peak of $2,359, however, it promptly tumbled back down. 

The lower inflation data recalibrated expectations of when the Fed will cut interest rates, increasing the probability of a September cut to 55% from around 50% previously. This is positive for Gold, which as a non yielding asset tends to appreciate when interest rates fall. That said, Gold investors remain cautious about the trajectory of interest rates amid still-high inflation and a Fed that is still hazy about its intentions. 

Gold to be supported during the summer 

Gold is likely to be supported during the summer as investors weigh the odds of future interest rate moves from major central banks and Asian demand stays bouyant, according to Bart Malek, Head of Commodity Strategy at TD Securities. 

Whilst Gold tumbled from all-time highs in April after the Fed signaled it would be delaying expected interest-rate cuts indefinitely, it has found a floor as speculators have short-covered following a poor run of US data including Friday’s core PCE undershoot. Thus the metal is both capped and supported, suggests the strategist. 

“Considering that the Fed's favorite inflation measure is showing a consistent move lower, the Gold market should be well supported through the summer. But, since policy makers will need more proof that their economic modeling is reflecting reality and that rates are indeed restrictive sufficiently to control inflation, no large rally is expected for now. Gold moves and investor positioning will very much be data dependent,” says Malek. 

Gold is further supported by Asian buying as a hedge against currency depreciation. Most recently Chinese buying has been noted as a counter-weight against the devaluation of the Renminbi, adds Malek.

Technical Analysis: Gold makes lower lows

Gold price broke out of a rectangular consolidation (red-shaded area in the chart below) – probably a Bear Flag continuation price pattern – on May 29. Bear flags are like upside-down flags with a steep decline – the “flagpole” – followed by a rectangle or square price consolidation – the “flag square”.

The breakout of the flag square activated the Bear Flag’s downside target at $2,295 (the 0.618 Fibonacci extrapolation of the flagpole that formed from May 21-23). 

The target for the break below the trendline lies nearby at $2,303 (the 0.618 Fib. extrapolation of the down-move prior to the break).

Gold has step-declined to lower lows since then, providing further bearish confirmation following the breakout. Recently bears managed to push the price down to $2,314, only $11 away from the first downside target. 

XAU/USD 4-hour Chart

Gold's 4-hour chart now exhibits a sequence of declining peaks and troughs and a major trendline break, suggesting the precious metal is in a short-term downtrend and favoring short positions over longs. 

More bearish moves could very well be on the way, suggesting Gold could even fall to $2,272-$2,277 (the 100% extrapolatin of the move prior to the trend-line break, historical support and resistance). 

The precious metal’s medium and long-term trends are still bullish, however, and the risk of a recovery remains high. That said, price action is not supporting a resumption hypothesis at the moment. 

A break above the peak of the rectangular consolidation zone at $2,362 would be required to bring into doubt the integrity of the short-term downtrend, otherwise further weakness is foreseen.