Gold Dipped, Tensions Rise in Lebanon & Asia

Gold prices experienced a significant downturn before the market close. Despite a bullish attempt to break past recent highs yesterday, the effort fell short due to a well-timed data release which threw water on gold’s fire. The data also came out just before the weekend close, which is when buyers sometimes sell to avoid weekend risks.

The data was indicating that the U.S. service sector is not slowing down. The S&P Global services PMI rose to a 26-month high - a sign of economic strength. The strength from this simple reading may have dampened hopes on even 1 Fed rate cut this year, whether this fear is warranted or not.

The S&P flash U.S. services PMI reported a June reading of 55.1, which was above the expected 54.0. The manufacturing PMI also showed growth, rising to 51.7 despite expectations of 51.0. These readings, both above 50, indicate economic expansion.

However, the market generally has more respect for, and hence plans around, the ISM PMI’s. Right now they are showing manufacturing dancing just below 50 but with a slight improvement trajectory and services dancing just above 50 and sideways. This Friday will see our update to the Macro and Global Liquidity update which will talk to this.

Despite this recent decline, gold has climbed 22% over the past 12 months, reaching a record high last month on expectations of incoming interest rate cuts by the Federal Reserve. However, these cuts have yet to materialise as the Fed seeks confirmation that inflation is trending down to its 2% target. Most analysts now anticipate only one rate cut this year. Any data indicating a slowing U.S. economy continues to support gold, with hopes that the Fed might speed up rate cuts.

Market sentiment is currently mixed, with some corners still expecting multiple rate cuts this year and viewing economic data releases as buying opportunities for gold, and others believing the Fed's tough talk.

The U.S. Dollar Currency Index could help us get some additional insights into gold's movements. 106.1 marks a very strong resistance level just overhead on the weekly chart. A fall in gold could be halted if the DXY reaches this point. If that DXY level is breached, an even stronger resistance sits at 106.58. This technical point of view could help call into question the short-term outlook of extended profit taking on buys and further short positions.

War Tensions

Israel is reportedly preparing for an "all-out war" with Hezbollah. There has been gunfire along the Israel/Lebanon border nearly every day since October 7th. 400+ have been estimated to have been killed in the clashes, mostly Hezbollah soldiers. If Israel expands the current conflict, the Hezbollah chief has threatened a war with "no limitations, no rules, and no ceilings".

Meanwhile, in the South China Sea, there have been increased clashes between China and the Philippines. Philippine President Ferdinand Marcos Jr. stated that his country will not be intimidated after the most recent conflict, which involved sailors being attacked with machetes and axes. The recent clash was reported to have taken place near Second Thomas Shoal. The area is 200KM from Palawan (Philippines), and over 1,000KM from China's closest major landmass. The countries have blamed each other for the clashes.

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