- Gold has found support at a major trend line and paused its short-term downtrend.
- Gold has been on sale in November due to expectations that interest rates would remain high in the US.
- US CPI inflation data for October could impact interest rate cut expectations and the price of Gold.
Gold (XAU/USD) is trading just above $2,600 on Wednesday after the precious metal’s November sell-off to seven-week lows found technical support at a major trend line. Gold takes a pause as markets await the release of key US inflation data, which could impact the future path of interest rates, a key driver for the non-interest-paying yellow metal. When interest rates fall, it is favorable for Gold as it makes it more attractive to investors compared to other assets.
Although the US Federal Reserve (Fed) was on track to reduce interest rates due to declining inflation and concerns about a weakening labor market – and this drove the price of Gold to all-time highs – everything changed with the election of Donald Trump to the White House. Trump’s radical protectionism and “free market” economic policies will likely boost inflation again, experts say, keeping interest rates high – which is bad for Gold.
The release of the US Consumer Price Index (CPI) for October on Wednesday will provide an updated snapshot of the inflation situation and could impact market expectations about whether the Fed will cut interest rates at its policy meeting. December monetary policy. Market-based odds are currently 62.1% for a 25 basis point (bp) cut (0.25%) and 37.9% for the Fed to leave interest rates unchanged in the future. range of 4.50%-4.75%, according to CME FedWatch. This could change if the CPI surprises economists’ expectations. Market watchers are paying special attention to elevated services inflation, which remains much higher than goods inflation and is the main contributor to CPI still above target.
Gold ETF outflows a factor in recent decline
The fall in the price of Gold in November was partly driven by large outflows from US Exchange Traded Funds (ETFs). These allow traders to buy shares in Gold without investors having to own bullion. Gold ETFs shed around $809 million (12 tonnes) net in early November, driven by outflows from North America and partially offset by inflows from Asia, according to data from the World Gold Council (WGC).
Gold demand is also expected to decline in China, the world’s largest consumer of the yellow metal, amid an economic slowdown that is expected to accelerate as the US imposes higher tariffs on Chinese imports.
Gold is also falling due to competition from alternative assets such as Bitcoin (BTC), which is trading in the high $80,000s, near all-time highs, due to expectations that the Trump administration will relax cryptocurrency regulation.
US stocks are also rising as investors anticipate lower tax burdens on companies and looser regulations, boosting company profits, and this could also be diverting funds from the precious metal.
Gold generally rises as a result of investors seeking safety amid rising geopolitical risks. One of those risk factors has been the war between Russia and Ukraine, which Trump boasted he could end “in one day – 24 hours.” However, this has not been the case in reality. Trump is said to have warned Russian President Vladimir Putin “not to escalate in Ukraine” in a phone call. However, Putin does not appear to have heeded their advice, as reports of Russian casualties continue to mount.
Another geopolitical hot spot is the Middle East, where the prospect of peace now seems less likely given Trump’s appointment of former Arkansas Governor Mike Huckabee as ambassador to Israel. Huckabee is a well-known Zionist and supporter of Israeli Prime Minister Benjamin Netanyahu. He has said he does not support a two-state solution to the Israeli-Palestinian problem and sees the West Bank as belonging to Israel. His appointment will likely embolden Israel and bring more bloodshed to the region. If tensions rise, it could boost safe haven flows into Gold.
Technical Analysis: XAU/USD stops at an important trend line
According to technical analysis, the precious metal is now in a short-term downtrend, and since it is a principle of technical analysis that “the trend is your friend”, the odds favor a continuation to the downside. However, Gold is rebounding from the support of an important trendline for its long-term uptrend around the $2,600 mark.
XAU/USD Daily Chart
A decisive break below the important trend line would confirm an extension of the short-term downtrend, likely to the next target at $2,540, the 100-day SMA, and the August highs.
A decisive breakout would be one accompanied by a longer than usual red candle that broke well below the trend line and closed near its low, or three red candles that broke clearly below the trend line.
However, the precious metal remains in a medium to long-term uptrend, giving a material risk of an upside reversal in line with these broader bullish cycles.
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.
