Gold price (XAU/USD) has extended its correction but a consolidation is likely ahead due to thin trading activity. Broadly, the precious metal may continue to remain in the positive trajectory as bets in favour of early rate cuts by the Federal Reserve (Fed) are firming due to easing labour market conditions and a clear downtrend in the underlying inflation. This lowers the opportunity cost of holding the Yellow Metal and weakens the US Dollar, in which it is priced.
The Gold price is set to end 2023 with stellar gains of more than 13.50%. Deepening expectations for the Fed to start reducing interest rates from March 2024 will also keep appeal for the Gold price upbeat in 2024. Further action in the Gold price will be guided by the United States Nonfarm Employment and ISM Manufacturing PMI for November.
Gold price drops below Thursday’s trading range of $2,064-2,088. Trading volume is thin amid absence of significant number of market participants due to the festive week. The precious metal witnessed some profit-booking on Thursday. On a braoder note, upward-sloping 20 and 50-day Exponential Moving Averages (EMAs) point to more upside ahead. In addition to them, oscillators indicate strong momentum in an upside direction.
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.
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