- Gold recovers, driven by an increase in geopolitical risks after a sharp sell-off the previous day.
- Speculation that a BRICS gold-backed currency could become an alternative to the US dollar is also driving flows.
- XAU/USD remains bullish as its overall trend remains intact and the commodity continues to make higher highs.
Gold (XAU/USD) recovers to trade back around $2,730 on Thursday, after a 1.2% sell-off the previous day, likely driven by profit-taking. The precious metal is rising again on continued safe haven flows as the conflict in the Middle East continues with no signs of resolution.
Additionally, news that North Korea has sent troops to Russia to potentially engage in war with Ukraine has raised geopolitical risks, as has growing election uncertainty in the US.
Gold recovers as major central banks cut interest rates
Gold sees further upside as a result of the Bank of Canada’s (BoC) decision to cut its interest rate by 50 basis points (bps) on Wednesday and growing speculation that the European Central Bank (ECB) could do the same in December, following the release of lukewarm economic data for the region. With interest rates falling rapidly around the world, Gold should benefit as this will increase its attractiveness as a non-interest paying asset.
That said, in the US market expectations about the path of interest rates have been subject to a substantial revision after the release of robust labor market data that reduced the chances that the US Federal Reserve (Fed. ) aggressively cut US interest rates.
Another factor that could help the price of Gold rise is the focus on the BRICS 2024 summit in Kazan, Russia, as members – especially Russia – look to find an alternative to the dominance of the US Dollar (USD), with a currency backed by Gold considered as a viable alternative.
Technical Analysis: Gold retreats and then rebounds
Gold fell more than 1.2% on Wednesday but rebounds on Thursday, continuing its upward recovery.
The yellow metal is in a constant upward trend in all time frames (short, medium and long term) which, given the technical opinion “the trend is your friend”, favors further increases. Having surpassed $2,750, the next important target level is at $3,000 (round number and psychological level).
XAU/USD Daily Chart
The Relative Strength Index (RSI) has pulled back from overbought, advising long position holders to close their long positions and open shorts. It is possible that this could herald a deeper correction, however, given the strong uptrend, it is not enough on its own to be certain. Support lies at $2,750, $2,700 (key round number levels) and $2,685 (September high).
Gold’s strong overall uptrend, however, suggests that any correction will likely be short-lived, and then the broader uptrend will resume.
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.
