Gold price rises as US yields cool down, although downside remains favored
- Gold price rebounds following a modest decline in US Treasury yields.
- The precious metal remains under pressure as Fed rate cut expectations for June wane.
- Stubborn US PPI data suggested inflation pressures persist.
Gold price (XAU/USD) moves higher in Friday’s European session as US bond yields cool slightly after a strong run-up on Thursday. Market expectations for the Federal Reserve (Fed) reducing interest rates in the June have diminished, suggesting that the slight recovery in the Gold price could merely be a pullback that could be used as a selling opportunity by investors.
The precious metal registered a sharp sell-off on Thursday on hotter-than-expected United States Producer Price Index (PPI) figures for February. Fed policymakers have brought down price pressures significantly but the last mile before the 2% target appears to be sticker than progress yet made. The prospect of high interest rates benefited the US Dollar (USD), weighing on the XAU/USD pair.
10-year US Treasury yields are slightly down to 4.28% on Friday, but easing expectations for the Fed announcing rate cuts in June have led them to a high of 4.30% this week from 4.03% previously. This has significantly increased the opportunity cost of holding investments in non-yielding assets such as Gold. Meanwhile, the US Dollar Index (DXY) refreshes a three-week high near 103.50.
Daily digest market movers: Gold price rebounds slightly ahead of US Michigan CSI data
- The Gold price rebounds to $2,170 as yields on US Treasury bonds decline slightly. The broader appeal of Gold remains uncertain as investors reassess expectations for Federal Reserve rate cuts in the June policy meeting after the February US PPI report indicated that producers hike prices of goods and services at a higher pace than anticipated.
- Market expectations for Fed rate cuts in June have dented as hot PPI data has indicated that Fed policymakers need not rush to reduce interest rates. According to the CME FedWatch tool, the chances for a rate cut have come down to 59% from 74% a week ago.
- This week, the consumer price index (CPI) data also showed inflation remains sticky. Stubborn price pressures have cast doubts over Fed Chair Jerome Powell’s commentary in his Congressional testimony that the central bank is not far from gaining confidence that inflation will return to the desired rate of 2%.
- Apart from the US PPI, the US Census Bureau reported that Retail Sales in February rebounded less than expected. The Retail Sales rose 0.6% while investors anticipated a 0.8% growth. In January, sales contracted by 1.1%, downwardly revised from the 0.8% decline previously estimated.
- Meanwhile, investors are shifting focus to the Fed’s interest rate decision, which will be announced on Wednesday. The Fed is widely anticipated to keep interest rates unchanged in the range of 5.25%-5.50%. The central bank will also release economic forecasts and the dot plot, which will indicate Fed officials’ expectations for interest rates over time.
- Before that, the preliminary Michigan Consumer Sentiment Index will be in focus, which will be published at 14.00 GMT. Sentiment is forecasted to have remained steady at 76.9. The data indicates individuals' perceptions of economic prospects. Upbeat figures tend to signal high consumer spending, faster economic growth, and a strong labor market while declining numbers generally indicate that individuals’ confidence in economic prospects is fading.
Technical Analysis: Gold price bounces back to $2,170
Gold price rebounds to $2,170 but trades inside Thursday’s trading range. The precious metal has been confined in a range between $2,153 and $2,180 in the last three trading sessions, indicating indecisiveness among market participants. The yellow metal exhibits a Symmetrical Triangle formation on an hourly timeframe, which indicates a sharp volatility contraction.
On a daily timeframe, an advancing 20-day Exponential Moving Average (EMA) near $2,115 indicates that the near-term demand is still strong. Still, any upside is expected to remain restricted.
The 14-Relative Strength Index (RSI) retraces from its peak near 84.50, although the upside momentum is still active.
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, which are both major reserve and safe-haven assets. 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.