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Gold finds a bottom as geopolitical risk catalyzes demand

  • Gold recovers amid continued geopolitical risk aversion.
  • Demand from investors, including central banks, due to Gold's safe-haven qualities remains high.
  • XAU/USD finds support and remains in a short-term uptrend, indicating that it could recover.

The price of Gold (XAU/USD) stabilizes at $2,330 on Tuesday as geopolitical risks continue to stoke demand for safe-haven assets.

However, gains could be capped by data out of the US indicating that interest rates are likely to remain elevated for some time, reducing the appeal of the precious metal, which does not offer yields.

The price of Gold finds a floor in the face of geopolitical risks

Gold price finds a bottom on Tuesday as rising geopolitical risks drive demand for the safe-haven asset.

The increase in protests against the Israeli occupation of Gaza, the opening of a new front in Ukraine by Russia and fear of a fragmentation of global trade have raised the “threat level” of geopolitical risk by one notch.

The IMF warns that world trade is in danger

In a speech Monday at the Stanford Institute for Economic Policy Research, Gita Gopinath, First Deputy Managing Director of the IMF, warned: “Countries are reassessing their trading partners based on their economic and national security concerns,” adding that If this trend continues, “we could see a broad decline in global standards of engagement and, with it, a significant reversal of the benefits of economic integration.”

The sanctions of the West and the United States against Russia, Iran and other emerging market countries are a factor in the “fragmentation” of trade alliances according to geopolitical criteria. The response of investors and central banks is to hoard Gold.

Gold Alternative to the US Dollar

The abandonment of the US Dollar as a means of international trade by the BRIC countries has increased the demand for Gold as a possible substitute.

This has been the main reason for the increase in demand for Gold by non-Western central banks and the corresponding reduction in US Dollar reserves.

Gold is seen as a possible substitute for the US dollar as a safe store of value in international trade agreements between nations with volatile national currencies, according to the Carnegie Endowment for International Peace, a Washington-based advisory service.

Gold limited by US data

However, the rise in the price of Gold could be limited by survey data by the Reserve Bank of New York, according to which American consumers continue to expect store prices to rise over the next year. Data indicates that the Federal Reserve (Fed) may have to keep interest rates high for longer to fight inflation.

New York consumer sentiment in April, released on Monday, showed that one-year inflation expectations rose to 3.3%, from 3.0% in March, the level they had been at since November 2023. The reading is well above the Federal Reserve's 2.0% target and makes it likely that the Fed will keep interest rates higher for longer.

Since Gold is a non-interest-bearing asset, it is a less attractive option when real interest rates are high.

Real interest rates, that is, the interest that investors can earn minus inflation, remain relatively high according to data from the Federal Reserve Bank of Cleveland, increasing the opportunity cost of holding non-yielding assets such as Gold.

10-year real interest rate. Source: Federal Reserve Bank of Cleveland

Technical analysis: The price of Gold finds support after its decline

The price of Gold (XAU/USD) has found a bottom after the decline in recent sessions.

Gold broke below major support from previous highs around $2,350, but has since found support just above another set of highs around $2,330.

XAU/USD 4-hour chart

Despite the sharp correction, the precious metal remains in a short-term uptrend, which given the old saying “the trend is your friend”, is likely to resume and drive prices higher again. There is still no sign of the uptrend resuming, although the bearish momentum on the pullback has run out for now.

Assuming the uptrend resumes, the next target for Gold would be around $2,400, roughly the April highs. Exceeding $2,378, the high of May 10, would be confirmation.

The medium and long-term charts (daily and weekly) are also bullish, adding a supportive backdrop for Gold.

Source: Fx Street

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