Gold price (XAU/USD) struggles to find a direction in Tuesday’s European session amid a lack of data drivers as the economic calendar in the United States is light this week. The two-day sell-off in the precious metal has paused for a while as various Federal Reserve (Fed) are lined up to provide their outlook on interest rates. The rally in the US Dollar Index (DXY) has paused, but more upside is likely as Fed policymakers consistently deny the need for early rate cuts.
The chances of aggressive rate cuts by the Fed have sharply diminished as the US economy is outperforming. Fed policymakers have warned that an early rate-cut decision could support demand and boost the economy, which would slow the progress of inflation declining towards the 2% target.
The Gold price oscillates in a tight range around $2,025 on Tuesday. The precious metal remains inside Monday’s trading range, which indicates that investors await a fresh economic trigger for further guidance. The 50-day Exponential Moving Average (EMA) at $2,021 continues to provide support. On a broader note, the Gold price is expected to remain well-supported above the psychological cushion of $2,000. Meanwhile, the 14-period Relative Strength Index (RSI) indicates a lackluster performance ahead, oscillating in the 40.00-60.00 range.
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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