Gold prices edge slightly higher during the North American session at the beginning of the week, up by 0.28%, as investors await the Federal Open Market Committee (FOMC) decision. At the time of writing, the XAU/USD trades at $2,643, above its opening price but off the highs of the day.
The US economic docket remains light with the release of S&P Global Flash PMIs for December, which came mixed. Business activity in the manufacturing sector weakened after improving last month, while the services sector printed its highest reading in 2024.
The data lifted the Greenback, which according to the US Dollar Index (DXY) rose 0.07% to 107.01. Meanwhile, Bullion dipped from daily highs of $2,664.
The Federal Reserve (Fed) will meet for the last time this year on December 17 and 18. Estimates suggest the Fed will cut interest rates by 25 basis points, but traders are eyeing the release of the Summary of Economic Projections (SEP) to grasp the path of interest rates in 2025.
Lower interest rates are usually a tailwind for the non-yielding metal. However, there is growing speculation that the Fed might adopt a gradual stance as the upcoming Trump administration hints at inflation-prone fiscal policies.
Gold prices tend to rise in lower rate environments and with higher geopolitical risk, which have both subsided of late.
The US economic docket will feature the release of Retail Sales, Industrial Production, the FOMC policy decision, and the release of the core Personal Consumption Expenditures (PCE) Price Index.
The Gold price uptrend remains intact, yet trades off last week’s lows beneath the 50-day Simple Moving Average (SMA) of $2,670. The Relative Strength Index (RSI) breached below its neutral line, indicating that sellers are in charge.
If Gold prices drop below $2,650, the next support would be the 100-day SMA at $2,600. On further weakness, the next stop would be the August 20 peak at $2,531. Conversely, if XAU/USD rallies past $2,650, the next resistance would be the 50-day SMA at $2,670, ahead of $2,700.
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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