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Gold posts gains amid rising geopolitical threat levels

  • Demand for gold increases as investors seek safety from escalating geopolitical risks.
  • Israel’s threat of an “all-out war” with Lebanon and the signing of an alliance between Russia and North Korea are intensifying concerns.
  • XAU/USD recovers and reaches a crucial level, calling into question its ongoing bearish pattern.

The price of Gold (XAU/USD) wakes up from its slumber on Thursday, gaining a lively half a percent to trade at $2,330, and finds itself at a technical crossroads that could define the directional trend for the rest of the summer.

The market mood is placid entering the European session, with Asian stock markets showing slight gains or moderate losses. That said, Gold sees gains from security demand as the global geopolitical threat level intensifies and world powers move their chess pieces on the global strategic board.

Gold gains as geopolitical threat level moves up a notch

Safe-haven Gold sees a surge in demand as investors watch with concern as geopolitical events intensify on the global stage.

In the Middle East, tensions between Israel and Lebanon reached boiling point on Wednesday after Israeli officials warned they had approved plans for the Northern Command to launch an “all-out war” with Hezbollah in Lebanon.

The threat arose in response to Hezbollah chief Hassan Nasrallah’s release of drone footage showing nine minutes of aerial footage of docks in the Israeli port city of Haifa, which are operated by foreign companies from China and India. Aljazeera News reported.

A full frontal assault by Israel would represent a significant escalation of the conflict in the region, something American diplomats are working to avoid. Lebanon has been involved in border skirmishes and exchanges of missile attacks with Israel since the start of Israel’s invasion of Gaza.

Russia and China make strategic moves

Gold also sees gains as investors note worrying events further east. On Wednesday, Russian President Vladimir Putin signed a pact with North Korean leader Kim Jong Un that ensures that either country will support the other if attacked.

Malaysia also announced plans to join the BRICS trade federation on Wednesday ahead of a meeting between its Prime Minister Anwar Ibrahim and Premier Li Qiang of China. In May, Thailand also announced plans to join the BRICS.

The growing power of the BRICS as a counterweight to Western and American domination worries some global strategists, as it puts the fluidity of world trade at risk.

Technical Analysis: Gold reaches a technical crossroads

Gold rises to a key resistance level at a trend line and the 50-day SMA, located around $2,340. XAU/USD has reached a technical crossroads that could determine the directional trend for some time.

A decisive break above the resistance set would invalidate the bearish head and shoulders (H&S) pattern that has been forming on the daily chart.

A decisive breakout would be one accompanied by a long green bullish daily candle that broke cleanly through the resistance and closed near its high, or three consecutive bullish candles that broke above the level.

Such breakouts would invalidate the bearish head-shoulder pattern and indicate a continuation of Gold’s broader uptrend, likely towards an initial target of $2,380 (June 7 high).

XAU/USD Daily Chart

However, a failure to break above would continue to support the possibility that Gold is forming a shoulder-head-shoulder reversal pattern. Such patterns tend to occur at market peaks and signal a trend change.

Gold’s shoulder-head-shoulder chart pattern has completed a left and right shoulder (labeled “S”) and a “head” (labeled “H”). The so-called “neck line” of the pattern appears to be at the support level of $2,279 (red line).

A decisive break below the neckline would validate the head-shoulder pattern and trigger bearish objectives. The most conservative first target would be $2.171, calculated by taking the 0.618 Fibonacci ratio of the pattern height and extrapolating it down from the neckline. The second target would be $2,106, the full height of the pattern extrapolated downwards.

A break above $2,345, however, would call the shoulder-head-shoulder pattern into question and could signal a continuation higher, towards an initial target at the peak of $2,450.

Gold FAQs

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, apart 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.

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.

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.

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

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