What's Next For Gold Prices?

As today marks the first trading day of the second half of this year, gold traders have reason to be apprehensive. Gold prices have risen over 2.6% so far this year, and nearly 3.19% over the last year. Investors are debating if the rest of the 2023 can bring another market high or a further price correction.

In April of this year, gold prices almost reached $2050, marking a new all-time high. There was widespread pessimism at the time due to concerns that U.S. financial upheaval, caused by regional banks, might spread to the rest of the globe. Instead, the U.S. government responded swiftly and adopted the appropriate regulations and because of this, gold prices began to fall as gold traders diversified and started to back riskier assets, leading to a significant upswing in the U.S. equities market.

There are a lot of elements that interact strongly with one another to determine the true direction of gold prices, but traders primarily focus on the fortunes of China and the United States, the world's two largest economies. China's economic activity remains low; today's publication of the Chinese Caixin Manufacturing statistic, for example, further demonstrates that the Chinese economy is far from humming along at full speed. The Chinese Caixin Manufacturing PMI is a crucial economic indicator, and it was formerly effortless to publish results that were easily over 50, the threshold between contraction and growth. The reading of 50.5 today is lower than the previous reading of 50.9. The growth rates of China's GDP are also still quite low.

If the Chinese economy continues to underperform, investors and traders will likely get wary, increasing the likelihood that they will support less riskier assets like gold.

While the first half of the year saw a spectacular run in the equities market that wiped away a lot of gold's value, the economy remains far from ideal in the United States. Even while traders have become more wary in light of the Fed's new narrative, which emphasizes the urgent need for more rate rises in the United States, a recession is still very much a possibility. Gold prices tend to fall when the Federal Reserve raises interest rates, since doing so increases the dollar index. The Federal Reserve is committed to rein in inflation, which is now running at a pace twice as fast as the Fed's targeted goal level, so further interest rate increases will have a chilling effect on economic activity.

Reducing Background Noise

It's an undeniable fact that China's economic development has been less impressive than many expected; however, the PBOC is perhaps the only central bank that is less concerned with inflation and more concerned with growth. China cannot afford slower economic development, therefore it has already announced a few monetary policy-related actions to encourage growth by decreasing lending rates, and it is likely that there are a number of more such initiatives in the pipeline to stimulate economic growth. Because of the uncertainty surrounding China's economic development and risk-off trade, gold prices are more likely to consolidate or decline.

As for the United States, conventional wisdom is that the Federal Reserve has exhausted its hardline monetary policy options. It's merely saying this to keep the market from getting too excited and saying that it will increase interest rates two more times this year, when in fact we'll probably only get one. Or so Wall Street hopes. The present strength in the dollar index is heavily influenced by the market's expectation of two more interest rate rises from the Fed. The price of gold may strengthen if this uncertainty dissipates.

Risks to the Gold Market

Traders' risk appetite and the state of the economy come first. The price of gold is expected to gain momentum if the United States manages to escape an economic recession and the possibility of a rebound holds for the rest of this year.

The level of geopolitical tension should be closely monitored. The market currently does not anticipate a significant increase in hostilities between the United States, Russia, and China. However, the U.S.'s delicate diplomatic ties with Russia and China might boost gold prices significantly if tensions escalate.

Important Levels To Watch

From a purely technical pricing point of view, $1,800 will be the key level for traders to keep an eye on until the end of the year, with a break there likely clearing the way for the price to drop below $1,600. If prices are expected to rise, the high for the year, which is also the all-time high, will be the focal point of investor attention. If gold prices manage to climb over $2,200, they may go on to $2,300 and perhaps even $2,500.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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