- Gold faces intense sell-off following US inflation data for March.
- The general CPI and the core CPI grew by 0.4%.
- The escalation of geopolitical tensions keeps the demand for Gold intact.
The price of Gold (XAU/USD) falls sharply from new highs of $2,365 in the early hours of the American session, as the United States Bureau of Labor Statistics (BLS) has reported a Consumer Price Index report (CPI) stubbornly higher for March. Inflation grew steadily across key metrics, while annual headline inflation accelerated further to 3.5% from expectations of 3.4% and the previous reading of 3.2%. Economists expected inflation to remain firm due to rising oil prices, rents, insurance costs and portfolio management fees.
The strong CPI data forced traders to change their bets in favor of the Federal Reserve (Fed) starting to reduce interest rates from the September meeting. This scenario bodes well for interest-bearing assets such as US bonds and the US dollar. US 10-year Treasury yields soar to 4.5%. The US Dollar Index (DXY), which gauges the strength of the Dollar against six major currencies, rebounds to 105.00. The rate hike is expected to accentuate uncertainty over the number of rate cuts by the Federal Reserve (Fed), which policymakers anticipated three times this year.
In general, the Fed's long-term maintenance of higher interest rates puts downward pressure on non-yielding assets, such as Gold, by increasing the cost of investing in them. However, there has been an anomaly in gold in recent weeks, as demand for gold has remained robust even as traders reduced their big bets on the prospects for Fed rate cuts at the June and July meetings. .
Daily summary of market movements: Gold price falls sharply and US dollar rebounds
- Gold price falls vertically from new all-time highs around $2,365 due to multiple headwinds. March US inflation data and strong payrolls data, combined with overbought momentum oscillators, have put significant pressure on the price of Gold. This has shaken investor confidence that the Fed Federal cut interest rates at monetary policy meetings in June and July.
- Both the headline and core US CPI, which removes volatility from food and energy prices, rose 0.4%. Economists had forecast slow growth of 0.3%. Annual headline inflation rose sharply, 3.5%, compared to expectations of 3.4% and the previous reading of 3.2%. Annual core inflation rose steadily, at 3.8%. Investors expected a slight slowdown to 3.7%.
- Previously, the precious metal has seen a huge bullish run in recent weeks. Gold has remained the talk of the town in recent weeks due to a renewed escalation of tensions in the Middle East, which has reaffirmed safe haven offers and pent-up demand for precious metals by global central banks. Central banks accumulated gold stocks as a hedge against a possible economic slowdown.
- Moderating expectations for a ceasefire between Israel and Palestine also keep demand for gold rising. The Israeli proposal for a ceasefire on April 9 did not meet the demands of Hamas, which wants Israel to withdraw its forces and allow displaced Palestinians to return to their homes.
Technical analysis: Gold price retreats from new highs around $2,360
Gold price falls sharply as US inflation data deflates. The precious metal is approaching new all-time highs around $2,360. Short-term demand remains intact as all short-term to long-term exponential moving averages (EMAs) continue to trend higher.
On the downside, the March 21 high at $2,223 will be an important support zone for gold price bulls.
The 14-period Relative Strength Index (RSI) reaches 85.00, indicating strong bullish momentum. However, extreme overbought signals could trigger a slight correction.
Frequently asked questions about Gold
Why invest in Gold?
Gold has played a fundamental role in human history, as it has been widely used as a store of value and medium of exchange. Today, aside from its brilliance and use for jewelry, the precious metal is considered a safe-haven asset, meaning it is considered a good investment in turbulent times. Gold is also considered a hedge against inflation and currency depreciation, since it does not depend on any specific issuer or government.
Who buys more Gold?
Central banks are the largest holders of Gold. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and purchase Gold to improve the perception of strength of the economy and currency. High Gold reserves can be a source of confidence for the solvency of a country. Central banks added 1,136 tons of gold worth about $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the largest annual purchase since records exist. Central banks in emerging economies such as China, India and Türkiye are rapidly increasing their gold reserves.
What correlation does Gold have with other assets?
Gold has an inverse correlation with the US Dollar and US Treasuries, which are the main reserve and safe haven assets. When the Dollar depreciates, the price of Gold tends to rise, allowing investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken the price of Gold, while sell-offs in riskier markets tend to favor the precious metal.
What does the price of Gold depend on?
The price of Gold can move due to a wide range of factors. Geopolitical instability or fear of a deep recession can cause the price of Gold to rise rapidly due to its status as a safe haven asset. As a non-yielding asset, the price of Gold tends to rise when interest rates fall, while rising money prices tend to weigh down the yellow metal. Still, most of the moves depend on how the US Dollar (USD) performs, as the asset is traded in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold in check, while a weaker Dollar is likely to push up Gold prices.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
