- The price of gold experiences an intraday trend change from the more than one-month high reached on Thursday.
- Bets on a less dovish Fed and rising US bond yields undermine the non-yielding yellow metal.
- Geopolitical risks, trade war fears and bets on a Fed rate cut in December could support XAU/USD.
The price of gold (XAU/USD) is pulling back sharply after hitting a more than one-month high around the $2,726 area during the Asian session on Thursday and, for now, appears to have broken a three-day streak of earnings. Investors now appear convinced that the Federal Reserve (Fed) will take a cautious stance on cutting interest rates amid signs that progress in reducing inflation toward its 2% target has virtually stalled. Expectations of a less dovish Fed continue to push US Treasury yields higher, which in turn acts as a tailwind for the US Dollar (USD) and diverts flows of the metal yellow without performance.
Apart from this, a generally positive risk tone undermines demand for safe-haven assets and drags the price of gold to the $2,700 mark in the last hour. Meanwhile, markets now appear to have fully priced in a third straight interest rate cut by the Fed next week. In addition to this, lingering geopolitical risks arising from the Russia-Ukraine war and conflicts in the Middle East, along with concerns about US President-elect Donald Trump’s looming trade tariffs, could limit losses for the XAU/USD. This, in turn, warrants caution before confirming that the commodity’s recent breakout momentum has exhausted itself.
Gold price weighed down by expectations that the Fed could pause its rate cut cycle
- The release of US consumer inflation figures largely online on Wednesday reinforced market expectations that the Federal Reserve will cut borrowing costs again at its next policy meeting next week.
- The US Bureau of Labor Statistics (BLS) reported that the overall Consumer Price Index rose 0.3% in November, marking the largest increase since April, and the annual rate rose to 2.7% from the 2.6% in October.
- Additional details revealed that the underlying indicator, which excludes volatile food and energy prices, rose 0.3% during the reported month and was up 3.3% compared to the same period last year.
- According to the CME Group’s FedWatch tool, the probability of another 25 basis point rate cut by the Fed on December 18 soared to more than 98%, pushing the price of gold to a more than one-month high on Thursday.
- The benchmark bond yield rises to a two-week high amid expectations that US President-elect Donald Trump’s policies will increase inflation pressures and force the Fed to pause its rate-cutting cycle. rates.
- This, in turn, helps the US Dollar preserve its recent strong gains to a new monthly high, which, coupled with the prevailing risk environment, prompts some profit-taking around the non-yielding yellow metal.
- Meanwhile, the geopolitical risk premium remains in play amid the worsening war between Russia and Ukraine and ongoing conflicts in the Middle East. Additionally, trade war fears should help limit losses for XAU/USD.
- Traders now look to Thursday’s US economic docket, which includes the release of the US Producer Price Index and the usual weekly initial jobless claims data, for some boost later during the North American session.
- However, attention will remain focused on the expected FOMC policy meeting next week, which will play a key role in determining the next leg of a directional move for the non-yielding commodity.
Gold price bulls have the upper hand as long as they stay above the overnight low around the $2,675 area
From a technical perspective, the Relative Strength Index (RSI) on hourly charts has declined from slightly overbought conditions. Furthermore, the oscillators on the daily chart have started to gain positive traction, which, in turn, supports the prospects for the emergence of some buying at lower levels around the price of gold. Therefore, any further weakness below the $2,700 mark could continue to find some support near the overnight low, around the $2,675-2,674 area. However, some follow-through selling could pave the way for further losses towards the $2,658-2,656 confluence, which comprises the 50- and 200-period SMA on the 4-hour chart.
On the other hand, the Asian session high, around the $2,726 zone, now appears to act as an immediate hurdle, above which gold price could aim to break through the $2,735 barrier and test the supply zone. from $2,748-$2,750. Sustained strength beyond the latter will set the stage for a move towards challenging the all-time high, around the $2,800 neighborhood reached in October, with some intermediate resistance near the $2,775 region.
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
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.
