- The price of Gold is again positive for the second consecutive day, although the bullish potential seems limited.
- Geopolitical risks, China's economic woes and a softer risk tone benefit the safe-haven precious metal.
- Elevated US bond yields act as a tailwind for the Dollar and could limit the yellow metal's performance.
- Additionally, investors may prefer to stay on the sidelines ahead of Thursday's US CPI release.
The price of Gold (XAU/USD) has attracted some buying near the $2,024-$2,023 area during the European session on Wednesday and is now trading with a positive bias for the second day in a row. Against the backdrop of geopolitical risks arising from the war between Israel and Hamas and concerns about China's slow economic recovery, the reduction in forecasts of an early interest rate cut by the Federal Reserve (Fed) weighs on investor sentiment. This is reflected in a weaker tone in the stock markets and gives some support to the safe-haven precious metal.
That said, declining odds of a more aggressive easing of monetary policy from the Fed in 2024, in the wake of a still resilient economy, could hold back bulls from opening aggressive positions on the yellow metal, which does not offer returns. Additionally, the US Dollar is trading just below multi-week highs reached last Friday and remains well supported by elevated Treasury yields. This could further limit the price of gold, denominated in dollars, as traders eagerly await US consumer inflation figures to know the path of Fed rate cuts.
Daily Market Summary: Gold price fails to consolidate intraday rebound as uncertainty over Fed rate cut persists
- The uncertainty about when the Federal Reserve will begin to cut interest rates prevents traders from opening new directional positions around the price of Gold.
- The New York Federal Reserve reported Monday that U.S. consumers' inflation expectations fell in December to the lowest level in nearly three years, raising bets on an imminent change in the Fed's monetary policy.
- Meanwhile, the strength of the US economy, which is experiencing above-target inflation, gives the US central bank more room to keep interest rates higher for longer.
- This allows the yield on the 10-year US public debt to remain above the 4.0% threshold, which supports the Dollar and limits the rise of the yellow metal.
- The bears, however, seem reluctant and prefer to stay on the sidelines awaiting the latest US consumer inflation figures, which will be published on Thursday.
- Citing a senior US Defense Department official, CNBC reported late Tuesday that Iran-backed Houthi militants launched the largest attack yet on commercial merchant ships.
- A senior official at the People's Bank of China said Wednesday that the central bank can use monetary policy tools to provide strong support for reasonable credit growth.
- The official added that the PBoC will strengthen its counter-cyclical and cross-cyclical policy adjustments to create favorable conditions for the country's economic growth.
- No relevant macroeconomic data will be published in the United States on Wednesday, so the XAU/USD will be at the mercy of the dollar's price dynamics.
Technical Analysis: Gold price remains below the $2,040-$2,042 resistance, bearish potential appears intact
From a technical point of view, the lows around the $2,017 area touched on Monday, which now coincide with the 50-day SMA, should protect the immediate decline. A convincing break below that level could make the price of Gold vulnerable to accelerating the decline towards the psychological $2,000 level. Some continuation selling will expose the December low, around the $1,973 region, before
On the opposite side, the $2,040-$2,042 zone could continue to act as a strong immediate barrier, above which the Gold price could try to retest Friday's high, around the $2,064 zone. . The next major hurdle lies near the $2,077 area, which if cleared decisively will nullify any negative near-term outlook and pave the way for a return to the round $2,100 level.
Frequently asked questions about Gold
Why invest in Gold?
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.
Who buys more Gold?
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 Turkey are rapidly increasing their gold reserves.
What correlation does Gold have with other assets?
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.
What does the price of Gold depend on?
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.
