Gold prices started the new year on a weak note as US dollar buying appetite remained strong. U.S. Treasury yields are rising on bets the Fed will cut interest rates less and on concerns about deficit spending. XAU/USD weakens as fears of further escalation of the Israeli-Iranian conflict subside.
Gold price (XAU/USD) failed to take advantage of late Friday gains and retraced back to around $2,750, starting the new week with a small bearish gap. Dollar (USD) buying remains unabated, hurting commodities, as Treasury yields rise again amid growing expectations that the Federal Reserve will move ahead with small interest rate cuts. Apart from this, generally positive risk trends are seen as another factor putting pressure on precious metals.
However, the downside in gold prices remains moderate, driven by demand for safe-haven assets stemming from tensions in the Middle East and the chaotic US election. Traders also prefer to take a wait-and-see approach ahead of this week’s key US macro announcements: Q3 GDP report, personal consumption expenditures (PCE) price index, and the closely watched Nonfarm Payrolls (NFP) report. Maybe. Therefore, caution is advised before making any aggressive bearish bets regarding XAU/USD.
Daily Digest Market Movers: Gold prices weighed down by rising US Treasury yields and USD strength
The US dollar has risen to its highest since July 30 amid expectations that the Federal Reserve will ease its aggressive easing policy, adding to recent strong gains recorded over the past four weeks. Markets have almost fully priced in the possibility that the U.S. central bank will cut interest rates by 25 basis points at its November policy meeting, according to CME Group’s FedWatch tool. The latest polls show that the race between Vice President Kamala Harris and Republican candidate Donald Trump remains close amid concerns about the US budget deficit following the November 5 US presidential election. Additionally, Friday’s US macro announcement added to a recent string of positive indicators, suggesting the economy remains strong and confirming market bets on a small Fed rate cut. The U.S. Census Bureau reported that U.S. durable goods orders fell 0.8% in September, less than an expected 1% decline, while new orders excluding transportation rose 0.4%. In addition, the University of Michigan Consumer Confidence Index reached a six-month high of 70.5 in October, beating both preliminary results and the previous month’s reading. The yield on the benchmark 10-year U.S. Treasury note is holding firm near a three-month high hit last week, which is seen as positive for the U.S. dollar but weighing on lower-yielding precious metals. Iran said on Saturday it would not retaliate against Israeli attacks on military targets across its territory if ceasefire agreements are reached in the Gaza Strip and Lebanon. China will strengthen countercyclical adjustments in macro policy to promote economic recovery in the fourth quarter, Vice Minister of Finance Liao Min said on Monday.
Technical outlook: Gold prices remain in 1-week range below all-time highs
From a technical perspective, bullish traders should exercise some caution as the price failed to gain acceptance or gain momentum beyond the $2,748-$2,750 region last week. Additionally, the recent range-bound price action seen over the past week or so suggests that traders are indecisive about the next directional move. Therefore, wait for sustained strength above the aforementioned barrier or a convincing break below support for the short-term trading range around the $2,720-$2,715 zone before positioning for a solid short-term trajectory. That would be wise.
On the other hand, follow-through buying above the $2,748-$2,750 area could allow gold to retest its all-time highs around the $2,658-$2,659 area hit earlier this month. The subsequent rally could push XAU/USD towards the $2,770 zone, the resistance of the nearly four-month-old uptrend line, on its way to the $2,800 big mark.
On the flip side, any weakness below the $2,720-$2,715 range is likely due to decent support near $2,700, and a decisive break of this should pave the way for further losses. Thereafter, gold prices may accelerate their correction down towards the intermediate support around $2,675 and eventually fall to the horizontal support between $2,657 and $2,655.
Gold FAQ
Gold has played an important role in human history as it has been widely used as a store of value and a medium of exchange. Today, apart from their brilliance and use as jewellery, precious metals are widely seen as safe assets, meaning they are considered a good investment in turbulent times. Gold is also widely seen as a hedge against inflation and currency depreciation, as it is not dependent on any particular issuer or government.
Central banks are the largest holders of gold. With the aim of supporting their currencies in times of turmoil, central banks tend to purchase gold to diversify foreign exchange reserves and improve perceptions of economic and currency strength. High gold reserves can be a source of confidence in a country’s solvency. Central banks added 1,136 tonnes of gold worth about $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest annual purchase amount since records began. Central banks in emerging countries such as China, India and Türkiye are rapidly increasing their gold reserves.
Gold has an inverse relationship with the US dollar and US Treasuries, which are major reserve and safe haven assets. Gold tends to rise when the dollar falls, allowing investors and central banks to diversify their assets during times of turmoil. Gold is also inversely correlated with risk assets. Rising stock markets tend to push gold prices down, while declines in riskier markets tend to favor the precious metal.
Prices may vary depending on various factors. Geopolitical instability and fears of a deep recession can cause the price of gold to quickly rise from its safe-haven status. Gold, a non-yielding asset, tends to rise when interest rates fall, but rising costs usually put pressure on the yellow metal. Still, most moves will depend on how the US dollar (USD) behaves, as the asset is priced in dollars (XAU/USD). A strong dollar tends to suppress gold prices, while a weak dollar can push up gold prices.
