Gold’s price (XAU/USD) slightly recovers from a two-day low of $2,380 in Thursday’s European session. The precious metal continues to hold ground due to expectations that the Federal Reserve (Fed) will start reducing interest rates from the September meeting.
Meanwhile, some corrections in the US Dollar (USD) and bond yields have offered a cushion to Gold’s price. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, drops to near 103.00 from a three-day high of 103.37. Meanwhile, 10-year US Treasury yields tumble to near 3.90%. Historically, lower yields on interest-bearing assets bode well for non-yielding assets, such as Gold, by reducing the opportunity cost of investment in them.
According to the CME FedWatch tool, 30-day Federal Funds futures pricing data shows that traders see a 50-basis point (bp) cut in interest rates in September as imminent. The data also suggests that the Fed will reduce its key borrowing rates by more than 100 bps this year. Market speculation for the Fed approaching an aggressive policy stance was prompted by softening labor market conditions, signaled by slower job growth and a rising Unemployment Rate in July.
Gold’s price trades in a channel formation on a daily timeframe, which is slightly rising but broadly exhibited a sideways performance for more than three months. The 50-day Exponential Moving Average (EMA) near $2,370 continues to provide support to the Gold price bulls.
The 14-day Relative Strength Index (RSI) oscillates within the 40.00-60.00 range, suggesting indecisiveness among market participants.
A fresh upside would appear if the Gold price breaks above its all-time high of $2,483.75, which will send it into unchartered territory.
On the downside, the upward-sloping trendline at $2,225, plotted from the October 6 low near $1,810.50, will be a major support in the longer term.
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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