Gold recovers as simmering geopolitical risks keep safe-haven demand buoyant

• Gold returns to close to the May highs as buyers continued to pile in amid underlying geopolitical tensions.
• Robust central-bank demand is a key factor in keeping the precious metal bid. 
• After a deep correction, XAU/USD resumes its uptrending bias and pushes higher. 

Gold price (XAU/USD) trades higher on Wednesday, up by over half a percent in the $2,370s, as continued hoarding by central banks on the back of simmering geopolitical tensions drives demand.

The upside could be capped, however, by comments by the Federal Reserve (Fed) Chairman Jerome Powell, who suggested higher interest rates are here to stay, keeping the opportunity cost of holding the non-yielding precious metal unattractively high.

Gold price creeps higher on the back of sustained demand 

Gold price creeps higher on Wednesday as the demand outlook for the precious metal remains buoyant amid continued geopolitical and global trade tensions. 

In a speech at Stanford last week, Gita Gopinath, the First Deputy Managing Director of the International Monetary Fund (IMF), said that central banks, particularly in emerging markets, have been hoarding Gold in recent years as a hedge against the risk of, among other things, sanctions imposed by the West. 

“Gold purchases by some central banks may have been driven by concerns about sanctions risk. This is consistent with a recent IMF study confirming that FX reserve managers tend to increase Gold holdings to hedge against economic uncertainty and geopolitical including sanctions risk,” said Gopinath. 

The view is also backed up by data from the World Gold Council (WGC) showing strong demand in 2024 from central banks. 

Given the heightened tensions in the Middle East, Ukraine and the increasingly polarized stand-off between the BRICS nations and US-led allies, the trend is expected to sustain, keeping Gold prices supported.

US inflation data on tap

Gold price are likely to be impacted by US Consumer Price Index (CPI) data out on Wednesday, due to its influence on US interest rates. If the CPI data reflects a rise in inflation, it will force the Fed to keep interest rates at their current level or higher for longer. This in turn is likely to negatively impact the price of non-yielding Gold. 

In a speech on Tuesday, the Chairman of the Federal Reserve Jerome Powell suggested interest rates would remain high for a protracted period. 

"Inflation in Q1 was notable for the lack of further progress,” said Powell, adding, "We did not expect a smooth road on inflation, we have to be patient and let policy do its work."

Although the Fed had anticipated making several rate cuts in 2024, comments from many Fed officials including Powell have reflected a change in stance. Now, officials are saying the Fed needs to maintain interest rates at their current level to bring inflation down in a sustainable manner. This is likely to provide a headwind for Gold as it moves higher.

Technical Analysis: Gold price recovers after backslide

Gold price (XAU/USD) has recovered back up to almost the level of the May highs at $2,379, after finding support and resuming its short-term uptrend.

XAU/USD 4-hour Chart

Given the old saying “the trend is your friend”, Gold is likely to continue pushing higher, with the next target at around $2,400, roughly at the April highs. A break back above the $2,378 May 10 high would provide extra confirmation. 

The medium and long-term charts (daily and weekly) are also bullish, adding a supportive backdrop for Gold.