Gold price reverses major part of post-CPI decline, remains close to all-time peak
- Gold price attracts fresh buyers on Thursday following the previous day’s US CPI-inspired downfall.
- Geopolitical risks benefit the safe-haven XAU/USD amid a modest USD pullback from the YTD peak.
- Reduced bets for an early interest rate cut by the Fed might cap gains amid overbought conditions.
Gold price (XAU/USD) witnessed some selling on Wednesday and retreated from the all-time peak touched the previous day in reaction to hotter US consumer inflation figures, which tempered hopes for an imminent rate cut by the Federal Reserve (Fed). The precious metal, however, stalls the intraday slide near the $2,319 region and regains some positive traction during the Asian session on Thursday amid a generally weaker tone around the equity markets.
Expectations that the Fed will keep interest rates higher for longer, along with concerns over the worsening Middle East crisis, weigh on investors' sentiment and benefit the safe-haven Gold price. Meanwhile, a modest pullback in the US Treasury bond yields prompts some US Dollar (USD) profit-taking and turns out to be another factor lending support to the non-yielding yellow metal. Traders now look to the US PPI print and Fedspeak for short-term opportunities.
Daily Digest Market Movers: Gold price attracts haven flows amid persistent geopolitical risks, despite hawkish Fed expectations
- The US Dollar strengthened across the board amid a surge in the US Treasury bond yields in response to a robust inflation report and exerted downward pressure on the Gold price on Wednesday.
- The US Bureau of Labor Statistics (BLS) reported the headline Consumer Price Index (CPI) climbed 3.5% on a year-on-year basis and 0.4% compared with the previous month, surpassing expectations.
- Excluding volatile food and energy components, the core CPI accelerated to the 3.8% YoY rate, also beating estimates and stoking worries that the Federal Reserve may keep rates higher for longer.
- The minutes from the March FOMC meeting revealed that policymakers wouldn’t be cutting rates until they gained greater confidence that inflation was on a steady path back to the 2% annual target.
- The markets were quick to react and pushed back the expected timing of a first interest rate cut by the Fed to September from June and the number of 25 basis points cuts this year to under two.
- The yield on the rate-sensitive two-year US government bond and the benchmark 10-year Treasury note spiked to their highest level since November last year, pushing the USD to a fresh YTD peak.
- Ceasefire talks between Israel and Hamas have yielded no agreement, which, along with a possible Iranian retaliation over a suspected Israeli strike on its embassy in Syria, weigh on investors' sentiment.
Technical Analysis: Gold price might face resistance near the all-time peak, around $2,365 area amid overbought RSI on the daily chart
From a technical perspective, the Relative Strength Index (RSI) on the daily chart is flashing extremely overbought conditions and warrants some caution before placing fresh bullish bets around the Gold price. Hence, any subsequent move-up is likely to face stiff resistance around the $2,365-2,366 area, or the record high touched earlier this week. Some follow-through buying, however, should pave the way for a further near-term appreciation towards the $2,400 round figure mark.
On the flip side, the overnight swing low, around the $2,319 area, now seems to protect the immediate downside ahead of the weekly trough, around the $2,302 region. A convincing break below the latter might prompt some technical selling and drag the Gold price further towards the $2,267-2,265 horizontal support, which should now act as a key pivotal point for short-term traders.
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.