Gold price (XAU/USD) retreats sharply after touching over a one-month high, around the $2,726 area during the Asian session on Thursday and for now, seems to have snapped a three-day winning streak. Investors now seem convinced that the Federal Reserve (Fed) will adopt a cautious stance on cutting interest rates amid signs that the progress in lowering inflation toward its 2% target has virtually stalled. Expectations for a less dovish Fed continue to push the US Treasury bond yields higher, which, in turn, acts as a tailwind for the US Dollar (USD) and drives flows away from the non-yielding yellow metal.
Apart from this, a generally positive risk tone undermines demand for safe-haven assets and drags the Gold price to the $2,700 mark in the last hour. Meanwhile, the markets now seem to have fully priced in a third consecutive interest rate cut by the Fed next week. Apart from this, persistent geopolitical risks stemming from the Russia-Ukraine war and conflicts in the Middle East, along with concerns about US President-elect Donald Trump's impending trade tariffs, could limit losses for the XAU/USD. This, in turn, warrants caution before confirming that the commodity's recent breakout momentum has run out of steam.
From a technical perspective, the Relative Strength Index (RSI) on hourly charts has eased from slightly overbought conditions. Furthermore, oscillators on the daily chart have just started gaining positive traction, which, in turn, supports prospects for the emergence of some dip-buying around the Gold price. Hence, any further weakness below the $2,700 mark might continue to find some support near the overnight swing low, around the $2,675-2,674 area. Some follow-through selling, however, could pave the way for further losses towards the $2,658-2,656 confluence – comprising 50- and 200-period Simple Moving Averages (SMAs) on the 4-hour chart.
On the flip side, the Asian session high, around the $2,726 area, now seems to act as an immediate hurdle, above which the Gold price could aim to surpass the $2,735 barrier and test the $2,748-2,750 supply zone. A sustained strength beyond the latter will set the stage for a move towards challenging the all-time peak, around the $2,800 neighborhood touched in October, with some intermediate resistance near the $2,775 region.
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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