Gold Reaches 10-Week High on Strong China Demand and Investor Momentum

Gold prices extended their recent rally on Tuesday, reaching their highest level in more than two months as strong buying momentum and renewed demand from China outweighed traditional headwinds from a firmer U.S. dollar and rising Treasury yields.

Momentum Builds Despite Headwinds

The advance builds on a 2.4% jump from the previous Friday, which was triggered by data showing an unexpected decline in U.S. nonfarm payrolls for July. The rally has been notable for its resilience against factors that typically pressure the non-yielding precious metal, such as a stronger dollar and higher bond yields.

According to Tony Sycamore, a senior market analyst at IG, this resilience points to several factors at play:

• "Fear-of-missing-out" (FOMO) buying from investors who missed gold's earlier decline.
• Short-covering by speculative accounts closing out bearish positions.
• A return of safe-haven demand amid market uncertainty.

China Buying and Fed Focus

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Demand from China has emerged as a significant pillar of support for bullion. The People’s Bank of China increased its gold reserves in July by the most since October 2023, according to official data released last week, reinforcing a trend of steady official-sector buying.

Investors are now turning their attention to upcoming U.S. inflation data, with the Consumer Price Index (CPI) due on Wednesday and the Producer Price Index (PPI) on Thursday. These reports will provide crucial clues about the Federal Reserve's future interest rate path.

Markets are currently pricing in a 52% probability of a September rate hike and an 81% chance of an increase by December, according to the CME FedWatch Tool. Higher interest rates tend to dull the appeal of holding gold, which does not generate interest income.

Technical Outlook

The recent rebound has put gold on a course to test significant technical barriers. Sycamore noted that the precious metal is approaching a key downtrend resistance level, which is further reinforced by the 200-day moving average. A sustained break above this zone could signal a stronger and more prolonged recovery for bullion.