- Gold price drifts lower for the second successive day amid receding geopolitical tensions.
- Reduced Fed rate cut bets continue to underpin the USD and contribute to the downfall.
- The fundamental backdrop warrants some caution before placing aggressive bearish bets.
Gold price (XAU/USD) plunged over 2% on Monday and registered its biggest daily loss since June 13, 2022, amid receding fears about a wider Middle East conflict, which dented demand for traditional safe-haven assets. Apart from this, reduced bets for interest rate cuts by the Federal Reserve (Fed) drag the non-yielding yellow metal to sub-$2,300 levels, or over a two-week low during the Asian session on Tuesday.
With the latest leg down, the Gold price has corrected over 5% from the all-time peak touched earlier this month. Any further decline, however, seems limited in the wake of speculation that major central banks will cut interest rates this year. Traders might also refrain from placing aggressive bets and prefer to wait on the sidelines ahead of this week’s key US macro releases, starting with the flash PMIs on Tuesday.
Daily Digest Market Movers: Gold price is weighed down by easing fears of a wider conflict in the Middle East
- Iran signaled that it has no plans to retaliate against the Israeli limited-scale missile strike on Friday, which, in turn, drives flows away from the safe-haven Gold price for the second straight day on Tuesday.
- Stronger-than-expected US payrolls data, along with the hotter consumer price inflation and hawkish comments from Federal Reserve officials, forced investors to scale back their bets for US interest rate cuts.
- The current market pricing suggests that the Fed could start its rate-cutting cycle in September and deliver only 34 basis points, or less than two rate cuts in 2024 as compared to three projected by the central bank.
- The yield on the benchmark 10-year US government bond holds steady just below a five-month high touched last week and continues to act as a tailwind for the US Dollar, further exerting pressure on the XAU/USD.
- Concerns about slowing global economic growth support prospects for synchronized interest-rate cuts by most major central banks in the second half of this year, which could lend support to the commodity.
- Traders look to the flash global PMI prints on Tuesday, which, along with the Advance US Q1 GDP report and the US Personal Consumption Expenditures (PCE) Price Index later this week, should provide a fresh impetus.
Technical Analysis: Gold price seems vulnerable below 23.6% Fibo., bears await acceptance below $2,300 mark
From a technical perspective, a sustained break and acceptance below the 23.6% Fibonacci retracement level of the February-April rally support prospects for a further intraday depreciating move. Oscillators on the daily chart, despite losing traction, are still holding in the positive territory and warrant caution for bearish traders. Waiting for follow-through selling below the $2,300 mark before positioning for deeper losses is advisable. Potential downside targets include the $2,260-2,255 area and the $2,225 intermediate support before reaching the $2,200-2,190 confluence.
On the contrary, a recovery might face resistance levels near $2,325, with further hurdles at $2,350-2,355 and $2,380. Breaking above these levels could signal a bullish shift in momentum towards the all-time peak near $2,431-2,432.
Gold FAQs
Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.
Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.
Gold has an inverse correlation with the US Dollar and US Treasuries. When the Dollar depreciates, Gold tends to rise, enabling 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 Gold price, while sell-offs in riskier markets tend to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.
Central Banks and Gold Reserves
Central banks play a crucial role in the gold market, not only as buyers but also as holders of significant gold reserves. Their actions, such as diversifying reserves and buying gold during turbulent times, can influence the perceived strength of their currencies and economies. The increasing gold reserves by central banks, especially in emerging economies like China, India, and Turkey, highlight the strategic importance of gold in maintaining financial stability.
Market Dynamics and Gold Price Movements
Gold prices are subject to various market dynamics, including geopolitical tensions, economic indicators, and currency fluctuations. Understanding the interconnectedness between these factors and their impact on gold prices can provide valuable insights for investors and traders. Factors like the inverse correlation between gold and the US Dollar, as well as the influence of interest rates on gold pricing, are key drivers of price movements in the precious metal market.
