- Gold price gains tracking with positive traction for the second day in a row on Tuesday.
- Geopolitical risks, softening US bond yields and weak USD demand benefit XAU/USD.
- Expectations of less aggressive rate cuts from the Fed favor USD bulls and could cap the precious metal.
The price of gold (XAU/USD) attracted some safe-haven flows after posting its biggest weekly drop in more than three years last week and snapping a six-day losing streak on Monday amid rising geopolitical tensions. Added to this is the softening of US Treasury bond yields, which led to profit-taking around the US Dollar (USD) following the post-election rally in the US to a new annual maximum and turned out to be another factor that benefited the yellow metal without performance.
USD bulls remain on the defensive during the Asian session on Tuesday and help the gold price recover further from a two-month low hit last Thursday. Meanwhile, US President-elect Donald Trump’s policies are expected to reignite inflationary pressures and limit the scope for further rate cuts by the Federal Reserve (Fed). This should keep US bond yields elevated and favor USD bulls, which could cap XAU/USD.
The price of gold continues to attract safe haven flows amid geopolitical risks arising from the conflict between Russia and Ukraine
- US President Joe Biden’s decision to authorize Ukraine to use long-range US missiles against military targets inside Russia sparked some safe haven flows and benefited the gold price on Monday.
- The US dollar extended its profit-taking from the yearly high touched last week in the wake of the pullback in US Treasury yields and provided additional momentum to the XAU/USD.
- The precious metal draws some follow-through buying for the second day in a row on Tuesday, although expectations of less aggressive rate cuts from the Federal Reserve could limit the upside.
- The incoming administration of US President-elect Donald Trump is expected to focus on cutting taxes and raising tariffs, which could stoke inflation and limit the Fed’s ability to ease monetary policy.
- A number of influential FOMC members, including Fed Chair Jerome Powell, recently suggested caution on rate cuts, which, in turn, favors USD bulls and should cap the yellow metal out of yield.
- Tuesday’s US economic agenda includes the release of construction permits and housing starts. Added to this is a speech by Kansas Fed President Jeffrey Schmid, which will boost the USD later during the US session.
- However, attention will remain focused on Friday’s manufacturing and services sector PMI data, which could offer early clues about how businesses are reacting to the threat of Trump’s proposed trade tariffs.
Gold price could face strong resistance near the Fibo level. 38.2%; $2,600 support is key for bulls
The strong overnight move comes after last week’s resilience below the 100-day SMA. Furthermore, the momentum pushed the gold price beyond the 23.6% Fibonacci retracement level of the recent correction from the all-time peak and underlines the prospects for further intraday gains. That said, the oscillators on the daily chart, although they have been recovering from lower levels, are yet to confirm a positive bias. Therefore, any subsequent strength will likely face strong resistance near the $2,634-2,635 region or Fibo level. of 38.2%. Some follow-up buying, however, could trigger a short-covering rally towards the $2,655-2,657 congestion zone en route to the $2,664-2,665 zone.
On the downside, the $2,600 level, which coincided with the Fibo level. of 23.6%, now seems to protect the immediate decline. A convincing breakout could expose the next relevant support near the $2,569-2,568 region and eventually drag the gold price towards the 100-day SMA, currently situated near the $2,551-2,550 zone. Some follow-up selling below last week’s low around the $2,536 area will be seen as a new trigger for the bears and pave the way for a drop towards the psychological level of $2,500.
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.
